How a HEA Works: Home Equity Agreements Made Easy

Key takeaways

• HEAs enable you to get a lump sum without taking on additional debt payments or selling your property. 

• In exchange, you agree to sell your home in the future, the HEA provider receives a percentage of the proceeds at the end of the agreement, generally 10 years. In the meantime, you continue to live in the property as usual.

• If you don’t want to sell your home by the end of the 10-year term, you can buy the provider out at any time during the agreement.

• Unlike home equity loans (HELs) and home equity lines of credit (HELOCs), HEAs are not loans, and therefore have no monthly payments or interest charges.

We’d like to introduce you to a home equity product you may not be familiar with.

Personal loans, reverse mortgages, home equity loans, home equity lines of agreement, selling your property: there are many alternatives to consider when you’re in a bind for cash, but before you make a decision, you should know how a HEA works.

With a HEA – short for home equity agreement – you can get a cash injection right now without burdening yourself with monthly payments and interest rates, 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 the income criteria are flexible.

What is a home equity agreement?

A home equity agreement (HEA) is a financial option that allows you to get a large 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 is usually 10 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.

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 an easier approval process.

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

How a HEA Works in 5 Easy Steps

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

1. Receive an estimate

The first step in the HEA process is to check how much cash you are eligible to receive. This typically will be anywhere from $30,000 to $500,000. The exact figure depends on the value of your home and how much equity you have built up. 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 a HEA on HEA providers’ websites. Most have easy-to-use online calculators. Getting this type of estimate won’t impact your credit score and will generate an estimate in seconds after you enter your financial information.

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 receive your funds right after you sign the HEA agreement. You are free to spend it as you see fit. However, it’s generally best to put the cash into something that will generate a return on the investment or improve your long-term financial situation. For instance, paying down existing debt or funding a needed home improvement project are frequent, and very good, uses of HEA funds.

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 HEAs is that you can decide when the agreement ends. You can terminate the HEA at any time during the term by buying the provider’s equity back or by selling the property. If you don’t have enough funds to buy the provider’s equity out in full, you often can buy portions of the agreement over time.

When the agreement ends, whether before or at the end of the original term, you settle with the provider according to the terms (e.g., 10% of your equity for 16% of your home’s future value).