What Does it Mean to Sell Equity in Your Home?

Key Takeaways

• You can sell your home equity as a way to access the value you’ve built in your home.
• Home equity agreements or home equity investments are contracts where you agree to sell a portion of your home’s value in exchange for cash up front.
• Selling your home equity doesn’t involve monthly payments, and the credit requirements tend to be more flexible than with a loan.

As you pay down your mortgage and your home’s value grows, your ownership stake — your equity — increases. You can liquidate that value by selling, or you can keep the home and sell a portion of your equity.

Selling equity is a way to convert a portion of the value you’ve built up in your property into cash, without necessarily selling the house. It’s one way for homeowners to find the cash they need for big expenses while staying in their home.

There are several ways you can sell the equity you’ve built in your home. There are also alternative ways to leverage your equity without selling it. Take a look at the pros and cons of selling some of your equity, and learn more about your options.

Understanding Home Equity

Home equity is the amount of your home’s value that you own outright. You can calculate your home equity by finding the current market value of your home and subtracting the remaining balance on your mortgage.

For example, for a $500,000 home with $300,000 left on the mortgage, your home equity would be $200,000:

• 500,000 – 300,000 = 200,000

Home equity also takes into account any improvements you have made that increased your home’s value. Suppose you remodeled your kitchen and replaced the aging roof. Now your $500,000 home is worth $575,000 — your equity is now worth $275,000, thanks to the value of those improvements.

Home equity is important because it’s an asset you own that you can use to achieve other financial goals. When you sell some of your home equity, you get access to cash you can use to cover tuition and education expenses, consolidate your debt, or renovate your home. You can access all of your equity at once by selling your home — but then you’d need to find a new place to live.

What Does it Mean to Sell Home Equity?

When you sell your home equity, you enter an agreement that typically provides you with a lump sum of cash today, in exchange for a percentage of your home’s value when the agreement ends. It’s considered an investment in your home’s appreciation. Home equity agreements aren’t structured like traditional home equity loans that have monthly payments.

Selling your home equity with this type of agreement is an increasingly popular way to gain financial flexibility. According to a study from the Urban Institute, 63% of homeowners who sell their home equity use the funds to pay down debt, and 21% use the money to renovate or remodel their home. It’s an effective way to extract the equity you’ve built to apply toward other needs.

An increasing number of homeowners are selling equity in their homes to gain access to cash. Between 2018 and 2020, originations of shared equity products – which include both home equity agreements and home equity investments, grew by nearly 900%. Originations of those products increased by another 900% from 2020 to 2022.

Home Equity Investments Explained

While this type of arrangement is often called a home equity agreement (HEA), you might also hear it called a home equity investment (HEI) or home equity sharing.

With a home equity agreement, you receive an upfront cash payment in exchange for a portion of your home’s value when the agreements ends. You remain in your home as usual, keeping up with maintenance and property taxes.

In most cases, when you sell your home down the road, you pay the agreed-upon percentage of the home’s value to the investor. If you have a mortgage, that takes precedence; the HEA takes the “second lien” position, meaning the mortgage is repaid first from sale proceeds, then the HEA investor receives their share. If you prefer to settle the home equity agreement without selling your home, you can buy back the investor’s share and retain full ownership.

Qualifying for a home equity agreement is typically more accessible than for a home equity loan, which often has stricter credit requirements. For example, 35% of cash-out refis and home equity loans or lines of credit are denied for credit-related reasons, according to the Urban Institute.

But you can often sell your home equity using an HEA with a lower credit score. In fact, nearly 30% of homeowners with an HEA had scores below 600, according to the Urban Institute’s study findings. At Unlock, the minimum credit score required for an HEA is 500.

Pros and Cons of Selling Equity

Selling your home equity is useful solution for many homeowners who want to access the value they’ve built in their home. As with any agreement, though, there are some considerations to think through.

Benefits to Homeowners

• Receive cash up front to be used as needed
• Convenient access to equity for those with less than perfect credit
• Useful for those who cannot qualify for cash-out refis or home equity loans
• You can remain in your home
• No monthly payments

Risks and Considerations

• Requires appraisal to determine home value
• Must settle agreement through a lump sum payment
• Must hand over the investor’s agreed portion of the profits at sale
• Second-lien placement can make refinancing more complex

Alternatives to Selling Equity

Selling your home equity is one way of accessing the funds you need. There are also some other ways to use your home’s value to get cash.

• Home equity loans or lines of credit: A home equity loan (HEL) uses your home equity as security, allowing you to borrow against it. You’ll typically have a fixed interest rate and fixed monthly payments until the loan is paid off. A home equity line of credit (HELOC) also lets you borrow against your home equity, but with a revolving line of credit instead. You can draw from your credit line up to your limit during the draw phase, then repay what you borrowed with interest during the repayment period. Both a HEL and a HELOC involve interest payments and require credit qualification.
• Reverse mortgage: The most common type of reverse mortgage is a Home Equity Conversion Mortgage, which is only for homeowners age 62 or older. A reverse mortgage pays you cash, often in monthly installments, which then accrues interest until you repay the mortgage and interest accrued by selling the home. It allows you to stay in the home, but there’s a possibility your spouse or heirs will have to move out if you die.
• Home sale-leaseback solutions: With a sale-leaseback, you sell your home to the buyer and receive the proceeds of the sale. Then, you immediately lease the home from the new owner, making regular lease payments. Leasebacks let you stay in the home, but you lose ownership and could be evicted if you don’t pay your rent.

Conclusion

Your home is likely one of your most valuable assets. The average home equity amount is $300,000, according to the analytics firm Cotality. Tapping into that value can open up a world of possibilities, especially considering the rising cost of other daily needs.

Selling your home equity offers a way to access your equity without adding to your monthly debt load. It’s not the right fit for everyone — but it’s increasingly popular and provides a flexible alternative to home equity methods requiring interest payments and high credit scores.