One of the primary advantages homeowners have over renters is the ability to build up — and tap into — home equity. This equity can be accessed through several loan products that either disburse a lump sum or provide a line of credit.
But most home equity products — including home equity loans and home equity lines of credit (HELOCs) — involve monthly payments. Home equity sharing agreements don’t.
Home equity sharing agreements are arrangements that allow homeowners to access their home equity without technically incurring debt. They essentially sell a percentage of their home’s future value in exchange for an upfront lump-sum payment.
There are no monthly payments or interest charged. Instead, home equity sharing agreements are repaid at the end of a set time period or when the homeowner eventually sells the house. However, these arrangements are far from risk-free. Let’s take a look at these agreements and their most significant pros and cons.
What is a shared equity agreement?
Equity-sharing agreements are similar to investing in the stock market. The investor buys “stock” in your home in the hope that its future value will increase. When the agreement’s term is up or the home is sold, the investor recovers their original investment plus a percentage of any gains in the value of the home. On the other hand, if the property loses value, the investor loses as well, just as you would if selling a stock that’s lost value.
Kenon Chen, executive vice president of strategy and growth at property analytics firm Clear Capital, says that home equity agreements have grown in popularity in recent years because they allow homeowners to access their equity without taking out a loan. This can make accessing equity easier and help keep cash flow free.
“They can be a really good option for folks that maybe are not ready to be approved for a traditional [home equity] product,” Chen says.
The pros of home equity sharing
No monthly payments
The most enticing upside to signing a home equity sharing agreement is that you won’t need to worry about the product’s debt cutting into your monthly budget anytime soon. Unlike traditional home equity loans or lines of credit, you won’t need to pay back the money owed in monthly installments, but rather as a lump sum at the end of the agreement. This allows you to keep cash flow free and avoid financial stress — at least for the time being.
No upfront payments required
Equity sharing agreements typically carry fees similar to those of home equity loans and lines of credit, including closing costs and origination fees. However, many home equity sharing companies allow these costs to be deducted from the funds they pay out. The amount you receive will be lower if you choose this route, but you won’t need a large upfront cash payment to complete the transaction.
Investment amounts can be large, and you can use the money for any purpose
How much money you can obtain from an equity sharing company will depend on your home’s value and how much future equity you’re willing to sell. Companies have varying minimum and maximum investment amounts, ranging from $15,000 to $600,000. Additionally, there are no limits on how you can use the money.
The investment company shares in the gain, as well as the loss, of equity in your home
Technically, you could pay back less than the initial amount received if your house drastically falls in value beyond the investment company’s initial risk assessment. In this scenario, you would gain more value out of your home equity than you would eventually have to pay back. However, the fact that the company can, to some extent, control the changes you make to your home, and that home values tend to rise over time, makes this outcome unlikely.
You don’t need great credit
With traditional equity products like home equity loans, your credit score and other financial factors play a big role. On home-equity sharing agreements, the investor is primarily looking at the value of the asset (your home) — not your financial attributes. In fact, with some companies, you can have a credit score as low as 500 and still qualify. Others have no income requirements, either.
Payoff times can be lengthy
Some home equity sharing companies offer agreements as long as 30 years, so you have time to use the funds as needed, and repayment isn’t due for many years down the road.
The cons of home equity sharing
You could owe much more than you received
In a home equity sharing agreement, the company you are in business with will start by getting an appraisal to determine your home’s value and how much equity you currently own. Once the assessment is in, the company will perform a risk adjustment to that value — essentially a downward adjustment to offset the risk of future equity losses. This adjustment can range from 5% to 27% of the appraisal, depending on the company. This adjusted value, not the full appraisal value, determines the amount you’ll receive upfront and will play a part in how much you’ll have to repay.
There may be restrictions on when you can sell your home, make improvements or buy back the agreement
Because you are entering a legal agreement with a company over the future value of your home, your agreement may include limitations on what alterations you can make to the property that could potentially devalue it. Some companies can also limit your ability to opt out of the agreement before the term ends or charge you penalties if you sell your home prematurely.
You may need to sell your home to repay the investment
At the end of the agreed-upon contract period, you will need to make a lump sum payment of the initial investment amount plus a percentage of any equity gained. You may be able to pay this sum before the end of the agreement term if you decide to buy out the contract or sell your home. For most homeowners, however, reaching the end of the contract will mean selling their home, refinancing or finding another source of funding to repay the investment.
Limited availability
Home equity sharing agreements aren’t widely available. The few companies that do offer them typically limit their agreements to a specific number of states — anywhere from 15 to about 30, depending on the company. You’ll need to shop around to find what options, if any, are available in your region.
How does a home equity sharing agreement work?
How much money you can obtain from an equity sharing agreement depends on your home’s appraised value, the risk assessment and the percentage of equity the investor buys.
For example, say your home appraises at $500,000. The company you choose as a co-investor makes a risk adjustment of 10%, bringing your home’s value down to $450,000. If you decide to sell 10% of your home’s future equity in exchange for a $50,000 payment, the math works out as follows:
Original adjusted home value: $450,000
Value at time of repayment: $600,000
Total appreciation: $150,000
You would have to repay $65,000 (the original $50,000 plus 10% of the total appreciation = $15,000).
On the other hand, if your home’s value decreases by $100,000 at the time of repayment, you would pay less money:
Original adjusted home value: $450,000
Value at time of repayment: $350,000
Total depreciation: $100,000
You would owe $40,000 (the original $50,000 minus 10% of the total depreciation = $10,000).
Home equity sharing FAQs
Is equity sharing a good idea?
Home equity sharing agreements can be a good idea if you have a lot of home equity and need to borrow cash without taking on another monthly payment. Just be aware that if your home increases in value by the time the money comes due, you could end up paying much more than you borrowed.
What is the downside to a home equity agreement?
The biggest downside to a home equity sharing agreement is that the home equity investor could end up taking a big share of your home’s appreciation if it grows in value by the time your agreement ends. They also may come with restrictions on how you can improve your home or when you can sell it.
How does a home equity share work?
Home equity sharing is when you sell a portion of your home’s equity to an investor in exchange for a lump sum payment plus a portion of your home’s future value. They’re offered through a variety of investment companies, including Unlock, Hometap, Unison and more.
Who is the best lender for a home equity agreement?
The best home equity sharing company depends largely on where you’re located, as most companies only operate in a handful of states. Your credit score, how much equity you have, how much you’re looking to borrow, and other factors should influence which home equity investor you choose, too.
Summary of Money’s home equity sharing: pros and cons
Home equity sharing is an option for homeowners who may not want to take on new debt, can’t meet the standards of a traditional home equity loan or are looking to access their equity without making monthly payments. However, there are risks: you will need to repay the investment amount plus a percentage of the value gained at the end of the contract period. Weigh your options and speak with a financial advisor before deciding if a home equity sharing agreement is right for you.