How to Settle Your Unlock Home Equity Agreement with a Home Equity Loan 

Key takeaways: 

• Using funds from a home equity loan can be a good way for some homeowners to settle their Unlock home equity agreement (HEA). 

• Homeowners who have used their HEA funds to pay off credit card or other debt, and improve their financial position, may now be in a position to qualify for a home equity loan at a good rate. 

When you take out a loan, you must repay it, usually in the form of monthly payments with interest. If you have a home equity agreement (HEA), though, you’ve entered into an agreement that requires you to “settle” it or “buy back your equity” in the time period specified in the agreement. With Unlock, that’s 10 years. Unlock also is unique among HEA providers in providing you the option to buy back your equity through partial payments at any time during the term. 

How settling with an HEL works 

HEA customers often settle when they sell their home. But if you decide to settle before the end of your term (in full or in part), you may be able to obtain the money to do so from a home equity loan (HEL). 

The idea is to use the funds from the HEL to buy back your equity and thereby end your HEA. You’d then have the HEL to repay, via monthly payments. 

Many homeowners enter into an HEA because they want to access the home equity they have accumulated – but their credit score or debt status prevented them from qualifying for any type of equity-based loan. By using the proceeds they received from their HEA to pay off credit card or other debt – they may have improved their financial positions to the point where they would be able to qualify for a traditional loan, such as an HEL, at a favorable rate.  

Qualification 

Since an HEL is a loan, you’ll need to qualify based on three main factors: your home’s loan-to-value (LTV) ratio, your debt-to-income (DTI) ratio and your credit profile.  

• LTV. To determine your LTV ratio, divide your current loan balance (mortgage plus the amount you would borrow with an HEL) by your home’s market value. Multiply by 100 to get a percent. In general, HEL lenders want to see an LTV of 80% or less, though some may consider borrowers with higher ratios. 

• DTI. This metric looks at how much of your income goes to debt payments. To figure out what yours is, divide your total monthly debt payments (including mortgage and proposed HEL payment) by your gross monthly income. Multiple the result by 100 to get a percent. It will vary by lender, but most want to see a DTI ratio of 43% or lower. 

• Credit. With credit scores, again, every lender is different, but almost all require a score of at least 620 to qualify for an HEL. Many require scores of 680 or higher, with the best rates going to those with the highest scores. In many cases, homeowners who used their HEA funds to pay down high-interest debt find that their credit scores have improved, and that they now can qualify for an HEL at a competitive rate. 

If you can qualify for an HEL, and at a good rate, using proceeds from an HEL to settle your HEA can be a good idea. As with any financial decision, there are pros and cons to consider. 

Pros 

• You are borrowing using the equity in your home. As housing prices have continued to climb in most markets, many homeowners have been continuing to build up significant equity in their homes. 

• You receive cash up front. With a home equity loan, you receive a lump sum amount. Depending on the lender, you can usually borrow 80-85% of your home’s value, less what you owe on it. You can use that money to buy back your equity from your HEA provider, and end your HEA. 

• The interest rate is fixed. With an HEL, the rate remains the same over the life of the loan, meaning your payments to repay the loan will be the same every month.  

Cons 

• It’s a loan. An HEL is a loan, meaning you are taking on additional debt and an additional monthly payment. You must be sure that your budget can comfortably accommodate the payments. 

• Interest rates may be high. In mid-January 2025, HEL rates were averaging about 8.5%, although they vary by lender and individual. Borrowers must carefully evaluate current rates, and the rate for which they can qualify. 

• You must be able to qualify. As explained above, you must be able to qualify for an HEL based on your credit, your home’s LTV ratio and your DTI ratio. 

• Your home serves as collateral. An HEL uses the borrower’s home as collateral. That means you could face a foreclosure if you do not keep up with payments for any reason. 

Preparing for how you’ll settle your HEA – whether at the end of its term or at any time during the term – is an important financial step deserving planning and evaluation. For some homeowners, taking out a home equity loan can be a prudent decision that helps them continue to move their finances forward.