A Guide to Home Equity Investments

Key Takeaways 

• Home equity investments offer cash in exchange for a portion of your home’s future value. 
• Income and credit requirements are flexible, there are no monthly payments, and you can stay in your home.  
• Home equity investments are not loans; they’re a contract that’s repaid when the home is sold, the term ends, or you request a buyout.  
• Exchanging future equity for cash may not be right for everyone, and it’s essential to carefully evaluate the contract, obligations, and costs associated with a home equity investment. 

Interested in unlocking the wealth you’ve built in your home equity but don’t want to sell your home or take out a loan? Home equity investments (HEIs), or home equity agreements (HEAs), serve as an alternative option for homeowners looking for a way to more flexibly access their home equity. HEIs and HEAs have been available to homeowners for some time but are still not well understood. You might have questions like: 

• What is a home equity investment and how does it work?  
• How does it compare to a home equity loan or HELOC?  
• When does using a home equity investment make sense?  

In this guide, we’ll provide an overview of home equity investments to help you understand how they work and whether they might be a good solution for your situation.

What is a home equity investment?

A home equity investment is a way to gain access to your home equity without a loan and without making monthly payments. How is this possible? Instead of borrowing against your house with a loan, you’re sharing future equity gains with the provider. When you sell the home or reach the end of your term, the provider’s share of equity will be repaid.  

Providers use a calculation to determine how much you’ll owe at settlement. Because your home’s value will change with market conditions, you won’t get an exact number of what you’ll pay when you exit the agreement. Typically, you’ll also see a cap that limits the amount the provider can receive when there’s significant appreciation in a home.

How does it work?

Home equity investments are structured as equity finance contracts. This is a legal means for the provider to make an upfront payment to the homeowners in exchange for a percentage of the home’s appreciation. In other words, you get money now for a share of your home’s future value.  

The process looks something like this: 

Part One: Get an estimate 

Contact a home equity investment provider (or two) and ask for an estimate of how much equity you could pull from your home. The estimate will be based on factors such as: 

• The amount of cash you want 
• The equity you have in your home
• Your home’s value
• Your financial profile (credit score, past bankruptcies, etc.)
• Occupancy type (primary versus secondary)

Though your estimate can give you an idea of how much cash you could unlock and what the equity trade would be, the total dollar amount won’t be determined until you settle the loan. A cost estimator can give an idea of what these numbers could look like.  

Part Two: Choose an amount and a provider 

Take your time to look at the numbers and decide on an amount that works for you. If you move forward, you’ll complete an application, and the provider will order an appraisal to confirm the value of the property. They will also conduct a title check to ensure the property is free from liens or other issues. Once that process is done, you’ll receive a final offer. If the numbers work for you, you’ll sign your documents and close on the agreement.  

Keep in mind that taking a higher percentage of your equity means the provider will share in a higher percentage of your home’s future value when you settle your HEI. Of course, home appreciation will also play a role in determining the amount you will pay when the term ends.  

Part Three: Keep up with maintenance, expenses, and occupancy 

After signing the contract, a lien is placed on your home with the county. (Once you settle the HEA, it’ll be released). You continue to own, maintain, and occupy the property as normal. You’ll need to stay current on your mortgage payments, property taxes and other homeowner obligations. Again, there’s no need to make payments on your home equity investment. 

Part Four: End the agreement and settle up 

You’re ready to end the home equity investment when you sell the home, buy out the provider, or reach the end of your term (usually between 10 and 30 years).  

At the end of the agreement, you’ll notify the provider of your intent to settle, and the provider will be paid their portion of your home’s value. This portion was determined at the outset of the agreement, but now that the ending home value is known, the final payoff amount is also known.  

If you’re selling your home, the provider will send a settlement statement to the escrow company. When the transaction closes, they will be paid from the funds generated from the sale.  

If you’re at the end of your term and don’t want to sell or move, you can pay with savings, settle with a home equity loan, or settle with a cash-out refinance. 

Home equity investment vs. Loans and HELOCs 

There are some clear differences between a home equity investment vs. a home equity loan or a HELOC. Both access your home’s equity, but with different terms. There are no monthly payments for a home equity investment, while you will be expected to pay a home equity loan or HELOC back in monthly payments. 

Other differences appear in the chart below: 

Who is a good fit for a home equity investment?

A home equity investment isn’t for everyone, but there are certain situations where it could make sense.  

Home equity investments may work best for people who: 

• Want to avoid adding more monthly debt: A home equity investment might be especially attractive to homeowners with high debt loads who prefer to tap equity without monthly payments.  
• Have a low credit score: If your credit score is low and you can’t qualify for a loan, a home equity investment could be the answer. You could be approved with a credit score as low as 500 in some cases.   
• Have minimal or unstable income: Retired and self-employed homeowners are often , locked out of many traditional lending paths because of strict income requirements. Home equity investments aren’t structured the same way as a loan, and since you don’t need to qualify to repay the loan, income qualifications can be more flexible. 
• Have below-average credit: With traditional loans or refinancing, you typically need a credit score of 620 to qualify. 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 a credit score as low as 500.  
   

Tap into your equity with Unlock

Unlock gives you access to your home’s equity—without taking on debt or monthly payments. In exchange, you share a percentage of your home’s future value. It’s flexible, fast, and doesn’t require refinancing. 

Conclusion

Home equity investments are a unique way to access your home’s equity. Qualifications are flexible and there are no monthly payments. However, you will give up a portion of your home’s appreciation. It’s essential to dive deep into your offer to understand the requirements, costs, benefits, and consequences of a home equity investment. 

FAQs:

Q. Is a home equity investment different from or better than a HELOC or loan? 

A. A home equity investment is different from a HELOC or a home equity loan in how the agreement is structured. Home equity investments offer cash up front with no monthly payments, but charge a percentage of the future equity of your home due in a lump sum at the end of the contract. Home equity loans and HELOCs are loans that have monthly payments and interest fees. 

Q.Do I need good credit to qualify for a home equity investment? 

A. It is possible to qualify for a home equity investment with less-than-perfect credit, but your score may affect the amount of equity you can pull from your home. The minimum credit score needed to apply for a home equity investment with Unlock is 500.  

Q. How do I settle a home equity investment? 

A. A home equity investment is typically paid back in a lump sum at the end of the contract, when you sell the home, or when you request a buyout (a partial buyout is also possible). If you have the funds or settle with funds from a home equity loan, you’ll get the settlement statement directly and pay the provider. If you’re selling the home or refinancing it, a settlement statement will be sent to the escrow company, and the funds from the sale of the home will be sent to the provider for what they’re owed.

Q. What happens if I sell my home?
A. If you sell your home, you’ll need to settle with the provider of your home equity investment. The provider will calculate their share by determining the ending home value with any adjustments needed. After the provider calculates their share, they’ll send a settlement statement to the escrow company with the exact amount due to the provider for the lien to be released. The escrow company will pay the provider at closing, ending the home equity investment.