The Pros and Cons of Home Equity Sharing 

Key takeaways: 

• Home equity sharing is a relatively new option for homeowners who have equity in their home and want to access it without taking out a loan.   

• Like all financial products and services, home equity sharing agreements offer both pros and cons.   

• No one way to access your home equity is the “right” way. It’s important to take time and evaluate options so you choose he best option for your situation. 

If you’re like many homeowners who have accumulated a lot of equity in your home, you may be looking at ways to access that equity and turn it into needed cash. Along with traditional loan products – like a home equity line of credit, home equity loan or cash-out refinance – you also may have heard of a home equity sharing agreement. 

Your home equity

Home equity is a measure of how much of your home you own outright. It’s defined as the current value of your home less anything you owe on it. So, if your home is worth $500,000 and you have a $300,000 mortgage (and no other loans), you have $200,000 of equity.  

It has often been hard for some homeowners to access their home equity because of the strict qualification requirements of loan products. Taking out a loan also means taking on additional debt, which many Americans do not want to do, particularly when interest rates are high. 

   

What is a home equity sharing agreement?

A home equity sharing agreement, also known as a home equity agreement (HEA), is a financial tool developed to help address needs that loan-based do not meet. In this type of agreement, a provider purchases a portion of the future value of your home. In exchange, you get cash proceeds up front.   

A home equity sharing agreement is not a loan. So there are no monthly payments associated with it. Nor are there any interest rates. Qualification requirements are more flexible than for loan products. During the term of the agreement, you live in your home as long as the agreement is in place, and are still responsible for your mortgage, property taxes, homeowners’ association fees, upkeep and maintenance and any other obligations you had before entering into the agreement. 

You end the agreement by buying your equity back. This can occur anytime before the agreement ends (often 10 years); it often happens when you sell your home. And with some HEA providers, like Unlock, you can even buy your equity back in partial payments throughout the term.  

Pros and cons of home equity agreements

As with most products and services, home equity sharing agreements have both pros and cons.  

Pros:

• No additional monthly payments. Unlike a home equity loan or home equity line of credit (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 rate. Because the agreement is not a loan, and there are no monthly payments, there are no interest rates to worry about.  

• Lower credit scores can qualify. Since a home equity sharing agreement is based on the value of your home, not your credit profile, you may be able to qualify with a credit score as low as in the 500s.  

• Income requirements are flexible. With some shared equity finance agreement providers, such as Unlock, there is no income requirement, making the agreement more attractive for retirees, self-employed individuals and others who may not have full-time traditional jobs or income. 

• Immediate cash. With a home equity sharing agreement, you’ll receive cash right away – cash that you can use for any reason you wish: debt payoff, home maintenance and repairs, making home improvements, medical bills, educational expenses, emergency funds or anything else. (Note that Unlock does have some qualifications for use for customers with credit scores lower than 549.) 
    

Cons

Home equity sharing agreements are not right for everyone. Here are some points to consider.

• Length of time you plan to stay in your home. A home equity sharing agreement is generally best suited for people who plan on staying in their home for a while. Because the amount of cash you’re entitled to is based on the future price of the property, you may want to allow time for your home to appreciate. That may not be a full 10 years (which is how long many HEA terms are), but in most markets, it’s probably more than just a couple of years.  

• Appreciation uncertainty. In that vein, it’s impossible to know how much, over what period of time, your home will appreciate.  

• Equity requirement. Most providers of HEAs require that you have at least 25% to 40% equity in your home. 

• Uncertainly about how much, or when, you will need your home equity money. If you aren’t sure exactly how much of your equity you want to use, or you think you might use it over time, you could consider a HELOC. There, you only take cash from your credit line when and if you need it.   

• Best for larger amounts of cash. If you need only a small amount of cash, a home equity sharing agreement is probably not the best option. For example, Unlock’s agreements require that you take at least $15,000 of your accrued equity.    

• Impact on heirs. If you pass away during the term of your agreement and aren’t survived by anyone who is a party to the agreement, your heirs will be required to settle your HEA with a lump-sum payment (often through selling the home). It’s important to inform your heirs if you decide to enter into a home equity sharing agreement  .
• Not available in all states. Home equity sharing agreements aren’t yet available to consumers in all states. If you are interested, keep an eye on Unlock as we continue to grow.  

How a shared equity agreement compares to traditional home equity products  

When evaluating alternatives to tap your home equity, you’ll want to look at how a shared equity agreement compares to some traditional home equity products.  

Conclusion

Home equity agreements, or home equity sharing agreements, are effective and powerful tools that help meet a real need for millions of homeowners who have wealth in their homes and want to access it. Agreements such as those Unlock offers have flexible qualification criteria, no additional monthly payments and no interest charges.   

Still, like any financial product or service, a home equity sharing agreement won’t be right for everyone. Take time to understand how an HEA works, and evaluate the pros and cons as you make your decision on how best to tap into your home equity.     

Shared Equity Agreement FAQs

Q. What is a home equity sharing agreement? 

A. A home equity sharing agreement, also known as a home equity agreement (HEA) or shared home equity finance agreement, is a financing option that allows you to access your home equity without refinancing or taking out a loan. The agreement provides you with an up-front cash payment in exchange for a portion of your home’s future value. 

As a home equity sharing agreement is not a loan, there are no additional monthly debt payments. Also, qualification is much simpler than with loan-based options. Credit scores as low as in the 500s may qualify and income requirements are flexible. In fact, with Unlock, there are no income requirements. The equity share agreement ends when you buy back your equity, anytime before the end of the term (often 10 years). With some providers, like Unlock, you can buy back your equity in partial payments throughout the term.
 

Q. Is a shared equity agreement better than a home equity loan? 

No method to access your home equity is inherently “better” than another. Every homeowner has unique circumstances, finances, goals and preferences that will guide them to the best product for them.  

Q. Do I have to make payments on a shared equity finance agreement? 

A. No. There are no monthly payments with a shared equity finance agreement. 

Q. What happens if I sell my home?

A. If you decide to sell your home within the term of the home equity sharing agreement, the provider will share in your home’s then-current value according to the percentage agreed up front. The provider will generally obtain an appraisal and a property inspection to provide an independent measure of your home’s value.   

The agreement provider will then give the escrow company a settlement statement and documents they need. At the closing of your sale, the escrow company will pay the agreement provider its share out of the sale proceeds.  

Q. How is Unlock different from other equity sharing companies? 

A. Unlock was founded with a deep commitment to homeowners and homeownership. We understand that homeowners need and deserve ways to access their home equity in today’s economy – without taking on more debt. We are dedicated to helping our customers move forward with confidence. 

Unique features of Unlock’s HEA include the partial buy-back ability and our Improvement Adjustment. With the partial buy-back feature, you are able to buy back portions of your equity over the term of your agreement; you don’t have to wait and do it all at the end of the term or if you sell your home before then.