Is a Home Equity Sharing Agreement a Good Option for You?

For most of us, your home is the most valuable asset you'll ever own. Over years of payments, the amount of the home that you own outright, also known as the equity, will increase, while the amount your lender owns will decrease.

That equity is itself a valuable asset, one you can borrow against if you ever need an infusion of cash to help pay for renovations to your home, to fund a new business, or to cover an large, unexpected expense.

Historically, the two most common ways to borrow against your home's equity were through a home equity loan and a home equity line of credit (HELOC). Both are fairly traditional credit products that you can get from a bank or credit union. Recently, however, a new way to borrow against your home's equity has been gaining popularity: home equity sharing agreements. How do they work, how are they different, and should you ever use one? Here's what you need to know:

What is a home equity sharing agreement?

A home equity sharing agreement essentially involves an investor giving you cash in exchange for some percentage of either the home's future value, or the percentage increase of their share of the equity. The investor becomes a minority owner of the home, although with no occupancy rights. They aren't tenants and they can't lease out the home. Instead they own a stake in the home, similar to how you may own a stake in a company.

At the end of the term (typically between 10 and 30 years), the investor gets back their initial investment, plus a percentage of your home's value.

Features of a home equity sharing agreement

• Money upfront with no monthly payments. A home equity sharing agreement is not a loan or a line of credit. You don't make any payments until the end of term, though many companies do allow you to pay off the agreement early.
• Relaxed credit and financial requirements. Homeowners with poor credit may find it easier to qualify for a home equity sharing agreement than a traditional home equity loan, because these companies tend to have lower credit score requirements.
• Smaller available equity. While it may be easier to get a home equity sharing agreement, you'll also likely be limited to a significantly smaller amount of your equity, as compared to a home equity loan or HELOC.
• Massive balloon payment. Because you have to repay the entire advance at once, plus the investor's share of your home's appreciation over the years, the cost can be exorbitant. If you're planning to sell the house, this may make it difficult to afford your next house. And if you're not planning to sell the house, the bill may be entirely unmanageable.
• Creates a lien on your home. Just like any loan product that's secured by your home, you risk losing your home if you fail to repay what's owed.

Home equity agreement (HEA) vs. home equity investment (HEI)

There are two slightly different variations on the product: home equity agreements (HEA) and home equity investments (HEI). The terminology can seem interchangeable at times, and each provider may use a different name for their product, so the key is to make sure you're reading the fine print on any offer.

Generally speaking, HEAs are agreements where the investor advances you money in exchange for a future percentage of your home's total value. In other words, they would buy a 35% stake in your home today and expect to be repaid a 35% stake in your home in 30 years (when your home is presumably much more valuable).

HEI providers, on the other hand, are paid back the initial advance plus a percentage of the home's appreciation in value. It's a subtle difference, but a potentially costly one depending on the circumstances.  

Should you use a home equity sharing agreement?

If you've got a lot of equity in your home, but are unlikely to qualify for traditional credit products, a home equity sharing agreement can be a good alternative. It can turn your home's equity into cash quickly, without any payments due for years or decades.

That said, if you do qualify for more traditional loan or credit products, you may be better off starting there. Home equity sharing agreements can be pricy, with multiple costs upfront, including a mandatory appraisal, transaction or origination fees, title insurance, escrow, notary fees, state taxes, and potentially more. Then there's the large amount owed when it's time for the term to conclude or you want to buy your way out of the agreement.

Unlock, which provides home equity agreements, has a calculator to give you an idea of how much of your home's value would be yours and how much would be owed to Unlock at the end of the term. A quick example: 

• Home appraised at $850,000
• Homebuyer receives $141,000 in exchange for 34% of the home's future value
• Home appreciation is 1%
• Home value after ten years is $938,929

After ten years, when it's time to settle, Unlock's 34% share will equal $319,236, and your remaining 66% share will equal $619,693.

When considered as a portion of your home's value, the amount potentially owed at the end of the term seems reasonable, but when compared to the total cost for a similar home equity loan, the cost is quite a bit higher.

In other words, a home equity sharing agreement may be a good idea, but only in the right circumstances.

Who might benefit the most from a home equity sharing agreement?

• A significant amount of equity built up in home.
• Poor credit, may struggle to qualify for other home equity products.
• Need cash upfront, but can't afford to make payments immediately.
• Has a plan for how to exit agreement (sell home, other expected source of income).

If you're thinking of tapping into the equity in your home to pay off overwhelming debt, you may have better options. MMI offers a free online debt analysis to review your financial situation and help you understand the best options for paying off your debts. Don't risk your home without knowing all your options first.