Tapping your home equity can be a good way to pay off debt, fund home improvements, or cover education expenses. When it comes to accessing your home equity, you have plenty of options: a home equity loan, a home equity line of credit (HELOC), a reverse mortgage, cash-out refinancing, or a relatively new funding method, a home equity agreement (HEA).
A home equity agreement allows you to pull cash from your home without taking out a loan or selling your home. With an HEA, homeowners receive cash up front in exchange for a portion of their home’s future value. Because an HEA is not a loan, there are no monthly payments or interest charges for the term of the agreement, which can range from 10 to 30 years depending on the HEA provider. When you sell your home, the HEA provider will receive a percentage of the proceeds. Some providers also give homeowners the option to buy back some or all their equity at any time during the term.
For some homeowners, an HEA can be a great fit, but it’s not for everybody. Here are some questions to answer to help determine if it’s right for you.
- Do you have substantial equity in your home? If you’re a new homeowner or you’ve taken cash out of your home in the past, you may not have a lot of equity. As a reminder, home equity is the difference between the market value of your property and any outstanding loans you may owe on the property. If you don’t have a lot of equity built up, that could make obtaining a home equity agreement more challenging. Most HEA providers require homeowners to have at least 30% equity in their homes to qualify for an investment. Conventional loan options might be a better bet, but they’ll also carry stricter credit and income requirements.
- How much funding do you need? The answer to this question can help determine which route is best for accessing your home equity. HEA providers typically offer homeowners access to between $25,000 and $500,000, depending on their eligibility. If the amount you’re considering falls within that range, an HEA could be a good match. However, if you just need $15,000 to replace your roof, a home equity loan might make more sense.
- Do you have a significant debt load? If you’re already struggling to stay on top of mounting debt adding another loan to your obligations may leave you feeling overwhelmed. HEAs offer a loan-free way to access the funds you need, without monthly payments or interest charges. You can use the cash you receive to pay off debt and start improving your financial picture.
- Are you self-employed or retired? If your income is fluctuating or limited, qualifying for a traditional loan can be difficult. HEAs tend to have more flexible income requirements than home equity loans or personal loans. The loan-free aspect of HEAs may also be more appealing if you’re living on a fixed income and want to avoid taking on new monthly debt.
- Is your credit score below 620? That is usually the number you’ll need to qualify for a cash-out refinance, home equity loan or HELOC. And if you’re hoping for a good rate, your score will likely need to be higher. In contrast, you may be able to qualify for an HEA with credit score as low as 500.
- Do you plan to sell your home soon? If a sale is slated for the near future, it might make more sense to cash out your equity when you sell, rather than accessing it through a loan or a home equity agreement, or by replacing your mortgage in a cash-out refinance. If you need to make home repairs in advance of a sale and you have good credit, you could consider getting a home improvement loan from a contractor. You can also sell your home as-is, knowing that you may sacrifice a bit on price.
- How fast do you need to access funds? If you’re operating on a short timeline, an HEA is worth considering. Because they have flexible credit and income requirements, HEA providers can offer a streamlined process. While timeframes will vary based on the company, it’s typical to receive funds 30 to 60 days after starting your application.
Figuring out the best way to access your home equity is a big decision. If you have decent home equity and you’re searching for a loan-free funding method with flexible qualification requirements, an HEA could be worth a closer look. See how much you can pre-qualify for today.
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