What Is a Home Equity Agreement (HEA)? A Debt-Free Way to Access Your Home’s Value

A home equity agreement (HEA) is an alternative way to access the equity in your home without taking out a loan or adding monthly payments. Instead of borrowing from a bank, you receive a lump-sum cash payment from an investor in exchange for a share in your home’s future value. You repay the investor when you sell the home, refinance, or after a fixed term, typically 10 to 30 years.

HEAs are growing in popularity, especially in markets with rising home prices. Whether you’re in Dallas, San Jose, or somewhere in between, this alternative could offer a flexible solution. This Redfin article will go over how a HEA works and how it compares to other ways to access home equity.

Home equity agreement key takeaways: 

• A HEA lets you access cash from your home’s equity without debt or monthly payments, but you give up a share of future value.
• HEAs have upfront costs (3%–5% of the payout) and can be costly if your home appreciates. 
• Best for homeowners needing cash without a loan; HELOCs or home equity loans offer more ownership and flexibility.

What is a home equity agreement (HEA) and how does it work?

A home equity agreement, also referred to as a home equity investment (HEI) or shared equity agreement, is a financial arrangement where a homeowner sells a portion of their home’s future value in exchange for upfront cash. Unlike a loan, there are no monthly payments or interest. Instead, the investor or third-party is repaid either when the homeowner sells the property, refinances, or when the agreement reaches its agreed-upon term.

Here’s how the process typically works:

1. You receive an upfront payment: A company or investor gives you a percentage of your home’s current value in cash. The amount you receive is based on your home’s market value, your equity, and the agreement’s terms.
2. You don’t make monthly payments: Unlike a home equity loan or HELOC, a HEA doesn’t require monthly repayments. Instead, the investor waits until the agreement ends (usually after 10 to 30 years) or when you sell the home.
3. Repayment happens when you sell or refinance: When the agreement term ends, or if you decide to sell or refinance your home before then, the investor collects their agreed-upon share of your home’s value. If your home appreciates, they get a portion of the increased value. If it depreciates, they share in the loss. If you don’t sell your home before the agreement ends, you’ll typically need to repay the investor – either through refinancing, savings, or extending the agreement.
4. Fees and costs still apply: While HEAs don’t come with interest charges, there are still fees involved. These may include origination fees, closing costs, and early termination fees if you decide to buy out the investor’s share before selling the home. The fees and additional costs for a home equity agreement typically range between 3% and 5% of the cash you receive.

HEA example scenario:

Let’s say your home is currently valued at $400,000. A HEA provider offers you $40,000 in exchange for 10% of your home’s future value. Ten years later, you sell your home for $500,000. The provider receives $50,000 (10% of $500,000), meaning you pay back more than you received, but you didn’t have to make payments for a decade.

What are the pros and cons of a home equity agreement?

Pros of HEAs

No monthly payments: For homeowners who may be struggling with cash flow or simply don’t want the added burden of monthly payments, HEAs provide a way to access home equity without taking on debt.

Debt-free option: Unlike home equity loans or lines of credit, there is no new loan involved. There’s no interest rate, and you don’t need to worry about defaulting on the agreement.

Flexible qualification and fund use: HEAs often have more lenient credit score and income requirements compared to traditional loans, making them accessible to a wider range of homeowners. Plus, the funds can be used for any purpose – home improvements, debt consolidation, education costs, medical bills, or other personal expenses.

No risk of foreclosure: You’re not at risk of foreclosure from missed payments, but failure to meet terms, like maintaining the home or paying taxes, could still trigger legal action in some cases.

Cons of HEAs

Giving up a share of future home value: The biggest downside of a HEA is that you’re giving up a percentage of your home’s future value. If your home appreciates significantly, you could end up paying much more than you initially received in cash.

Repayment amount could be high: Depending on the terms of the agreement, the repayment amount could be substantial. If the property increases in value significantly over the term of the agreement, the investor’s share could be much larger than the cash you received upfront.

Limited control and investor restrictions: HEAs can limit a homeowner’s decision-making power. Some agreements require working with specific companies that may restrict how the property is sold, refinanced, or modified. Homeowners may need approval before making certain decisions regarding the home (such as improvements and repairs). They also have little say in the amount of equity sold or the share of future value the investor receives.

Requires significant liquid funds at repayment: Repayment of an HEA usually happens in one big payment when the home is sold or the contract ends. While this is often covered by sale proceeds, homeowners who aren’t selling may need to come up with a substantial amount of cash all at once – something that can be challenging without significant savings or refinancing options.

Who should consider a home equity agreement?

HEAs are not suitable for everyone, but they can be a good option for some homeowners. Here are a few scenarios where HEAs might make sense:

• Homeowners with limited income or poor credit who may not qualify for a home equity loan or line of credit.
• Homeowners who need cash for things like home repairs, medical bills, or other financial needs but prefer not to take on new debt or monthly payments.
• Homeowners who are planning to sell soon and are confident that their home will appreciate in value within the near future. This could be an effective way to tap into the value of your home without the burden of debt.

HEA vs. HELOC vs Home Equity Loan

A Home Equity Agreement (HEA), Home Equity Line of Credit (HELOC), and Home Equity Loans all let homeowners tap into their home’s value, but they work very differently.

Which is better?

It depends on the homeowner’s financial goals. If you want debt-free cash with no monthly payments, an HEA may be a good fit. If you prefer flexible borrowing and ongoing access to funds, a HELOC is likely the better choice. If you need a lump sum and want predictable monthly payments with a fixed interest rate, a home equity loan might be the best option.

Each option has trade-offs – the best option depends on how much flexibility, risk, and repayment responsibility the homeowner is comfortable taking on.

How to get a home equity agreement

Getting a home equity agreement involves a few key steps, similar to a home loan but with different approval criteria. Here’s how the process usually works:

1. Check eligibility:  Most HEA providers require at least 25% to 30% equity in your home, a minimum credit score (often around 620+), and that the home is your primary residence or an investment property.
2. Compare providers: Different companies offer varying terms, fees, and payout amounts. Shop around to find the best deal for your situation.
3. Get a home appraisal: The provider will assess your home’s market value to determine how much cash you can receive. This often involves a professional appraisal, which you may need to pay for upfront.
4. Review the terms: Carefully read the agreement, including how much equity you’re giving up, fees, and repayment terms. Some agreements have early buyout restrictions or additional costs.
5. Receive your payout: Once approved, you’ll get a lump-sum payment, typically 10% to 30% of your home’s value, minus any fees.
6. Manage your agreement: You won’t make monthly payments, but you’ll need to maintain the home and stay within the agreement’s terms. The HEA is repaid when you sell, refinance, or at the end of the term.

Home Equity Agreement FAQ’s 

1. Can I use a home equity agreement on an investment property or a second home?

It depends on the provider. Some HEA companies allow agreements on second homes and investment properties, while others require the home to be your primary residence. If you’re looking to access equity from a rental property or vacation home, check with individual providers to see if they offer this option.

2. How does a home equity agreement impact estate planning and inheritance?

If the homeowner passes away before the HEA term ends, the agreement typically transfers to their heirs. The heirs may need to sell the home, refinance, or buy out the investor’s share to settle the agreement. Some HEA providers may have specific clauses related to inheritance, so reviewing the contract is essential.

3. What happens if I want to buy out the investor’s share before selling?

Many HEAs allow homeowners to buy out the investor’s share before selling, but this often comes with fees or a required holding period before a buyout is permitted. The buyout price is typically based on the home’s appraised value at the time of the buyout, meaning you could owe more than you originally received if the home has appreciated.

4. Can I combine an HEA with a mortgage, HELOC, or other home equity products?

Yes, but there are restrictions. Some HEA providers allow homeowners to have a mortgage or HELOC alongside a HEA, while others prohibit additional liens or refinancing without approval. If you already have a mortgage, the HEA provider will often require you to have at least 25% to 30% equity in the home.

5. What maintenance or home condition requirements come with an HEA?

Most HEA agreements require homeowners to maintain the property to protect its value. This means you must keep up with repairs, insurance, and property taxes. Some agreements include clauses that allow the investor to inspect the home periodically or place restrictions on significant renovations.

6. How do HEA providers determine my home’s future value share?

HEA providers base their share on your home’s current appraised value and projected appreciation. The investor typically takes a larger percentage of future appreciation than the percentage of cash they provide upfront. For example, if they give you 10% of your home’s value in cash, they might claim 20% to 30% of future appreciation.

7. Can I negotiate the terms of a home equity agreement?

Some aspects of an HEA may be negotiable, such as the fees, percentage of appreciation given up, and early buyout options. However, many providers have standardized contracts, making negotiations difficult. It’s a good idea to compare multiple providers to find the most favorable terms.

8. What are the biggest risks of an HEA in a declining housing market?

If your home loses value, the investor may share in the loss, but this depends on the agreement. Some HEAs guarantee a minimum repayment amount, meaning you could still owe more than your home is worth. A market downturn could also make refinancing or selling the home more challenging, leaving you with limited options when the agreement term ends.

The post What Is a Home Equity Agreement (HEA)? A Debt-Free Way to Access Your Home’s Value appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.