If you're a property owner with significant equity in your home but prefer not to assume additional monthly payments or take out a conventional loan, a home equity agreement (HEA) could be an option worth exploring.

An HEA enables you to obtain cash from your home's equity without incurring debt or making monthly payments, but you relinquish a portion of your property's future appreciation. Generally, it's most suitable for homeowners who need immediate funds without taking on a loan, as opposed to a HELOC or home equity loan, which can become expensive if your home's value increases substantially over time.

HEAs are becoming increasingly popular, particularly in real estate markets experiencing rising property values. Whether you're located in Dallas, San Jose, or any other location, this alternative financing method could provide a flexible solution for accessing your home's equity.

This Redfin real estate article will explain how a HEA functions and compare it to other methods of accessing home equity.

What is a home equity agreement (HEA)?

A home equity agreement or HEA – sometimes referred to as a home equity sharing agreement, shared appreciation agreement, or home equity investment – allows you to access a portion of your home's value without obtaining a new loan or making monthly payments.

Rather than borrowing money from a financial institution, an investor provides you with a lump-sum cash payment today in exchange for a percentage of your home's future appreciation. You maintain ownership of the home and continue residing in the property, but the investor places a lien or stake in your home's future value growth.

The agreement typically concludes when you sell your property, refinance your mortgage, or reach the end of a predetermined term (usually 10 to 30 years). At that point, you repay the investor based on your home's current market value. Essentially, an HEA allows you to access cash immediately in exchange for surrendering a portion of your home's potential future appreciation.

How a home equity agreement works

Once you comprehend what a home equity agreement entails, it's beneficial to understand how the process unfolds from beginning to end. Here's an overview of how an HEA typically operates:

Home valuation: The procedure commences with a professional appraisal or market analysis to establish your home's current market value and available equity. The investor utilizes this figure to determine the amount of cash you can obtain.

You receive an upfront payment: A company or investor provides a lump-sum cash payment, typically ranging from 5% to 20% of your home's value, based on your equity and the agreement's specific terms. You can utilize these funds for home renovations, debt consolidation, or other significant expenses.

You don't make monthly payments: Unlike a home equity loan or HELOC, an HEA doesn't necessitate monthly payments or interest charges. You continue to own and occupy your home while the investor awaits repayment at the agreement's conclusion.

Investor's lien: To secure their investment, the investor places a lien on your property. You remain the complete legal owner and are still responsible for property taxes, insurance premiums, and maintenance costs. Since the investor's lien remains on your property until repayment, it can impact future borrowing capabilities. If you choose to refinance or obtain another home loan, you might need to settle or restructure the HEA beforehand.

Term length: Most HEAs have durations between 10 to 30 years, or continue until you sell your home, refinance your mortgage, or purchase the investor's share.

Repayment: When the term concludes, or if you sell or refinance earlier, you repay the investor the original amount plus their agreed-upon percentage of your home's appreciated (or depreciated) value. If your home's value increases, they receive a portion of that gain; if it decreases in value, they share in the loss.

Fees and costs: While HEAs don't include interest charges, they may involve origination fees, appraisal costs, and closing or early termination fees, typically amounting to 3% to 5% of the funds you receive.

HEA example scenario:

Suppose your home is currently valued at $400,000. An HEA provider offers you $40,000 in exchange for 10% of your home's future appreciation. Ten years later, you sell your home for $500,000. The provider receives $50,000 (10% of $500,000), meaning you repay more than you initially received, but you avoided making payments for ten years.

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

A home equity agreement can be an attractive method to access cash without assuming debt, but like any financial product, it presents both benefits and drawbacks. Here's what you should understand before determining if it's appropriate for your situation.

Pros of HEAs

1. Debt-free option with no monthly payments or interest: With an HEA, there's no new loan created, no interest rate applied, and no risk of payment default. You receive cash in exchange for a share of future home appreciation, not borrowed money, and maintain greater flexibility in your monthly budget.
2. Flexible qualification and fund use: HEAs frequently have more accommodating credit score and income requirements compared to traditional loans, making them accessible to homeowners who might not qualify for conventional financing. You can use the money for home improvements, debt consolidation, educational expenses, medical bills, or other personal needs.
   
3. No risk of foreclosure for missed payments: Since there are no monthly payments required, you're not at risk of foreclosure due to nonpayment. However, failing to comply with the agreement's conditions (such as maintaining the property, paying property taxes, or keeping insurance current) could still result in legal ramifications.
4. Shared-risk structure: If your home's value decreases, the investor participates in the loss, potentially reducing your repayment amount.
   
5. No immediate repayment pressure: The balance isn't due until the agreement term concludes, you refinance your mortgage, or you sell the property.

Cons of HEAs

1. You give up a share of future home value: The most significant disadvantage is that you're selling a portion of your home's future appreciation. If your property value increases substantially, you could end up repaying considerably more than the amount you originally received.
   
2. Repayment can be unpredictable and high: Because repayment is connected to your home's market performance, you won't know the exact payoff amount until the agreement concludes. If your home appreciates significantly, the investor's share can be substantial – sometimes exceeding what a traditional loan would have cost in interest.
   
3. Restrictions and limited control: Some HEA contracts impose limitations on how and when you can sell, refinance, or renovate your property. You might need investor approval for certain home improvements or refinancing decisions, and the lien can complicate future financing arrangements.
4. Potential refinancing limitations: The investor's lien can make refinancing or obtaining additional home loans more complex, since most lenders require the lien to be satisfied or subordinated before approving new financing.
   
5. Large lump-sum repayment: When the term ends, you'll typically need to repay the investor in one lump sum. If you're not selling your home, that could necessitate obtaining funds through refinancing, using savings, or extending the agreement.
   
6. Fees and long-term costs: Although HEAs don't include interest payments, they involve origination, appraisal, and closing fees – typically 3%-5% of the cash you receive. Over time, if your home appreciates rapidly, the investor's share could ultimately cost more than a standard home equity loan or HELOC.

Is a home equity agreement a good idea?

An HEA can be an intelligent alternative to traditional borrowing methods, but it's not suitable for every homeowner. Before proceeding, consider your financial objectives, homeownership timeline, and comfort level with sharing future equity.

You might consider an HEA if:

• You have substantial equity in your home and want to access cash without assuming new debt or monthly payment obligations.
• You don't qualify for, or prefer to avoid, a home equity loan or HELOC due to credit, income, or debt-to-income limitations.
• You're planning to sell in the near future and are confident that your home value will appreciate shortly. This could be an effective way to access your home's value without the burden of debt.
• You value current cash flow flexibility and are comfortable relinquishing a portion of your home's future appreciation.

You might avoid an HEA if:

• You anticipate your home's value increasing significantly, since the investor's share could ultimately cost more than a loan over the long term.
• You plan to remain in your home long-term and prefer not to face a substantial lump-sum repayment later.
• You're considering refinancing or additional borrowing, as the investor's lien can complicate future financing arrangements.
• You're uncomfortable with external restrictions on how you can sell, refinance, or improve your property.

An HEA is generally most appropriate for homeowners who want rapid access to cash and are comfortable surrendering some future appreciation. It's particularly useful for those with shorter ownership timelines or limited borrowing alternatives, while homeowners planning to remain in their homes long-term – and anticipating strong home value growth – might be better served by a traditional home equity loan or HELOC.

HEA vs. HELOC vs Home equity loan

	HEA	HELOC	Home Equity Loan
Cash access	Lump sum (one-time)	Borrow as needed	Lump sum (one-time)
Repayment	One-time payment when sold or term ends	Monthly payments + interest	Monthly payments + fixed interest
Monthly payments	None	Required	Required
Interest	No interest	Variable or fixed	Fixed
Equity impact	Gives up share of future home value	No equity given up	No equity given up
Risk	Owe more if home appreciates; possible minimum repayment if value falls	Foreclosure risk if payments missed	Foreclosure risk if payments missed
Best for	No-debt cash with no monthly payments	Flexible borrowing over time	Predictable repayment with fixed terms

Which is better?

It depends on the homeowner's financial objectives. If you want debt-free cash with no monthly payments, an HEA may be a suitable choice. If you prefer flexible borrowing and ongoing access to funds, a HELOC is probably the better option. If you need a lump sum and want predictable monthly payments with a fixed interest rate, a home equity loan might be the most appropriate selection.

Each option involves trade-offs. The optimal choice depends on how much flexibility, risk, and repayment responsibility the homeowner is willing to assume.

How to get a home equity agreement