How an HEA Works: Home Equity Agreements Made Easy

Key takeaways

• A home equity agreement (HEA) enables you to pull cash out of your home without taking out a loan or selling your property. 
• With an HEA, you receive a lump sum payment in exchange for a portion of your home’s future value.
• Use the net proceeds as you wish, and continue to live in your home as you always have
• At the end of the HEA term (typically ranging from 10 to 30 years), you can pay off your agreement by selling your home or using cash on hand.
• Unlike home equity loans (HELs) and home equity lines of credit (HELOCs), HEAs are not loans, and help you avoid taking on additional debt in the form of monthly payments or interest charges.

When it comes to accessing your home equity, you have a variety options: personal loans, reverse mortgages, home equity loans, home equity lines of agreement or simply selling your property. We’d like to introduce you to a home equity product you may not be familiar with – the home equity agreement or (HEA)

An HEA allows you to get a cash injection now without the burden of monthly payments and interest charges that come with most traditional loan products, or selling the home you love.

Qualifying for a HEA is relatively easy, too. The main requirement is to have built up some equity in your property. You don’t need a super high credit score, and there are no income requirements.

What is a home equity agreement?

A home equity agreement (HEA) is a financial option that allows you to access a lump sum without taking on additional debt payments or selling your property​.

You receive cash after signing the agreement. In exchange, the HEA provider will receive a percentage of your home’s future equity. The term of the agreement varies by provider but can range from 10 years to 30 years. In the meantime, you continue to live in the property as normal.

If you’d rather keep your home, you can do so by buying the service provider out at any time before the end of the term.

How are HEAs different from home equity loans (HELs) and home equity lines of credit (HELOCs)?

Don’t let the acronyms confuse you: HEAs are very different from both HELs and HELOCs.

HELs and HELOCs are types of loans that use your home equity as collateral. The main difference is that with a HEL, you get a lump sum, whereas a HELOC gives you access to a rolling line of credit.

In either case, you must pay the loan back with interest.

With a HEL, you start making monthly payments toward the principal right away. HELOCs have an initial draw period, typically up to 15 years, during which you only have to make interest payments. After that, you enter a repayment period when you must pay back the remaining principal plus interest.

With a HEL, you start making monthly payments toward the principal right away. HELOCs have an initial draw period, typically up to 15 years, during which you only have to make interest payments. After that, you enter a repayment period when you must pay back the remaining principal plus interest.

This isn’t how a HEA works. Unlike HELs and HELOCs, home equity agreements aren’t loans. That means there are no monthly payments or interest charges. It also makes for a streamlined approval process.

For a deeper dive into this topic, read our article on the differences between HEAs, HELs, and HELOCs.

How does a home equity agreement work? 

Here’s what you need to know about how home equity agreements work:

1. Receiving an estimate

The first step in the HEA process is to see how much equity from your home you could qualify to receive. This typically will be anywhere from $15,000 to $500,000. The exact figure depends on the value of your home and how much equity you have built up and a variety of other factors, including your credit score and whether your home is a primary residence or an investment property.  Your equity is the difference between the property’s current market value and how much you owe on it.

You can often get an initial estimate of how much you could receive from an HEA on HEA providers’ websites. Most have easy-to-use online calculators. Getting this type of estimate from Unlock won’t impact your credit score and will allow you to see how much equity you could potentially qualify to access. However, keep in mind that this is just an estimate. The provider will calculate the exact amount further into the process.

2. Understand the terms

If you choose to go through with the HEA, the next step is to understand the terms of the agreement. For example, you could agree to get 10% of your home equity in cash today and give the provider 18.5% of your home’s future value when you sell it at the end of the term.

3. Get the money

You’ll typically receive your funds after you sign the HEA agreement. You are free to spend it as you see fit. Many homeowners use their home equity to pay down existing debt or fund needed home improvement projects.

4. Live your life

Nothing changes for you during the HEA term. You continue to live in your home as normal, retaining full control over the property and enjoying all benefits of ownership, including any tax deductions for which you are eligible. That also means you remain fully responsible for all housing expenses, such as homeowners insurance and property tax.

5. End the agreement when you are ready

One of the main advantages of an HEA is that you can decide when the agreement ends, on your terms. You can terminate the HEA at any time during the term by buying the provider’s equity back or by selling the property. Some providers, like Unlock, allow you to buy back portions of your equity over time.

Or you can choose to stay in the agreement until your term ends and settle with the provider according to the terms provided (e.g., 10% of your equity for 20% of your home’s future value). If you are not ready to sell, you can use cash on hand to buy back your equity or potentially obtain funding through a cash-out refinance. 

Home equity agreement example 

Let’s say your starting home value – based on an independent third-party appraisal in your state – was $600,000, and you want to tap $60,000 of that equity. Note that the amount you actually receive would generally be about $57,000, as the HEA provider will deduct transaction expenses that generally are about 5% of the amount accessed. 

 While no one can predict exactly how much a property will appreciate over time, we’ll use a 3% annual appreciation rate, a value that’s historically considered “moderate.” So, 10 years later, at the end of the HEA term, your home would be valued at $806,000.  

To determine the share the provider would be owed at that 10-year mark, you would multiply the ending value by the percentage specified in your original agreement. If, for instance, that percentage was 20%, the HEA provider’s share would be $161,200.  

Benefits of a home equity agreement 

If you’re considering an HEA, review these benefits. 

• No additional monthly payments. Unlike an HEL or HELOC, you are not adding another bill to your monthly expenses with an HEA. You do not need to worry about fitting another payment into your budget. 
• No interest charges. Because the agreement is not a loan, and there are no monthly payments, there are no interest charges or fluctuating interest rates to worry about.  
• Lower credit scores can qualify. Since an HEA is based primarily on the value of your home, you may be able to qualify with a credit score as low as 500. 
• Income requirements are flexible. With some HEA providers, such as Unlock, there is no income requirement, making the HEA more attractive to retirees, self-employed individuals, and others who do not have full-time traditional jobs or income. 
• Immediate cash. You’ll receive cash right away – cash that you can use for any reason you wish. (Note that Unlock does have some qualifications for use for customers with credit scores lower than 549.
  

Is a home equity agreement right for you?

For homeowners looking for a flexible, transparent financing option to access their home equity, an HEA can be an excellent option. But as with any financial product or service, not every option is right for every person. Take time to understand how an HEA works, and weigh the pros and cons.  

Want to learn more? See if an HEA could work for you.

FAQ

Q. What is a home equity agreement?
A. A home equity agreement (HEA) is a financing option a wide range of homeowners can use to tap their home equity. It allows them to access cash up front without taking on additional debt payments or selling their property​. Unlike a home equity loan or home equity line of credit, an HEA is not a loan. 

Q. What are the benefits of a home equity agreement?  

A. An HEA offers a flexible, transparent financing option for many homeowners. Along with receiving cash right away, benefits include: 

• No additional monthly payments 
• No interest charges or rates to worry about 
• Simpler qualification process, often with no income requirement and with much lower credit score requirements than those of traditional loan products 

Q. Is an HEA better than a loan?
A. Each method of tapping home equity has its pros and cons. No method is inherently “better” than others. For homeowners who have built up equity in their homes and want to access it without taking out a loan (or selling their home), an HEA can be an very good option. 

Q. What happens at the end of a home equity agreement? 

A. You can buy out your provider at any time before the end of the term. Many people do this when they sell their home. Those who want to stay in their homes can often qualify for an HEL or HELOC to obtain the funds needed for the buyback. Depending on the market, a cash-out refinance can also be an option.