How to Fund a Business with Home Equity  

Key takeaways 

• Home equity can be a good source of funds for a business venture. 
• There are many options, but a home equity agreement may be the best for many homeowners. 

Do you have a business – or an idea for a business – that you need to fund? If so, congratulations! A new venture is a big step. While it may seem like a headache to figure out the logistics, we’re here to help simplify.  

One of the easiest and most logical ways to fund a business is with your home equity, and a home equity agreement could be your best bet to make that happen. 

As a reminder, home equity is the value of your property minus any loans you owe for it, like a mortgage. So, if your home is worth $500,000 and you owe a lender $400,000, you’ve got $100,000 in equity.  

Home equity options 

You’re probably familiar with options for accessing equity, meaning turning it into cash.  

Home equity loans allow you to take out a particular amount in one lump sum, and then pay it back over time. A home equity line of credit (HELOC), in contrast, allows you to take out only what you need over a period of time up to a particular cap (say, $50,000 of the $100,000 in the example above, over a 10-year term.) With a HELOC, you may pay back what you borrow during the 10-year period or wait until it’s over.  

Finally, cash-out refinancing allows you to take out a new mortgage for more than what you owe on your existing one. You pay off that existing mortgage and then pocket the difference between the higher, new amount and what you paid off. Since a cash-out refinance involves taking out a new mortgage, you’ll also pay all the typical mortgage processing and closing costs. 

Drawbacks to traditional home equity products 

All those products are sound options for tapping home equity. But they have big drawbacks. Most notably, they’re all loans, and all dependent on interest rates, which are at two-decade highs right now. Rates for mortgages are in the 6-7% range, and home equity loans and lines of credit are closer to 9%.  

What’s more, since all these options are some form of a loan, you’ll need an excellent credit score. If you’re starting a business or putting a lot of money into an existing one, you may be spending more than you’re used to, and your credit profile may not be as strong as it once was. Your income may be inconsistent – more coming in one month, less the next – which may make it difficult to qualify for and repay a monthly loan. 

No-loan option: the home equity agreement 

That’s where a home equity agreement (HEA) comes in.  

An HEA allows you to convert your equity into cash from your home without taking out a loan or refinancing your existing mortgage. With an HEA, homeowners receive cash at the beginning of the term in exchange for a portion of their home’s value in the future. HEAs are not loans, so they don’t have the drawbacks mentioned above. You must buy back your equity from the HEA provider by the end of the term, which often happens when you sell your home. Some HEA providers give you the option to buy back portions of your equity during the term of the agreement, which may be 10, 20, or 30 years.  

An HEA may be a good option if any of the following applies to you: 

• You may have trouble qualifying for personal loans or other home equity loan options because of income or credit score requirements; 
• Your income fluctuates, making it hard to take on monthly payments; 
• You don’t want to pay interest on products like credit cards or loans, and you want to avoid the associated costs of a cash-out refinance; 
• You don’t need much more than what the equity you have in your home could provide (within the HEA guidelines). 

There are some reasons you might consider something other than an HEA to fund your business, however. For example, there may be a loan product that’s more appropriate for the specific industry or business venture you’re in, such as with construction projects. There may also be grants or other small-business funding programs that have more favorable terms.  

Finally, it may be worth considering whether tapping into your hard-earned home equity is worth it for the risk you may be taking in funding your business. That is a personal decision, and only you can answer it. 

In short, there are many risks associated with funding a business, but if you’re up for the challenge, your home equity may be one smart place to start. Good luck!