Home Equity Agreement vs HELOC: Which One Could be Right for You?

Key Takeaways: 

• A home equity agreement (HEA) gives you access to cash without monthly payments. 

• A home equity line of credit (HELOC) is a revolving credit line you can borrow from on an as-needed basis. 

• The best option depends on your financial goals: HEAs have no monthly payments and the cost based on your home’s value at the end of the agreement, while HELOCs provide ongoing access to funds with regular monthly payments often at a variable interest rate. 

If you’re looking to tap into your home’s equity, you may be considering a home equity agreement (HEA) or home equity lines of credit (HELOC). Both allow you to convert your home value into cash, but they work in very different ways. This article will break down how a home equity agreement versus a HELOC works, so you can determine how to access your home equity. 

What is a Home Equity Agreement (HEA)?

Before choosing between the two, it’s helpful to understand what a home equity agreement (HEA) is and how it compares to a HELOC. An HEA allows homeowners to access their equity without taking on monthly payments.  

Instead, homeowners receive up front cash in exchange for a share of their home’s value when they end the agreement. During the HEA, you continue to own and live in the home as usual. 

At the end of the term, which is typically 10 to 30 years, you’ll settle the HEA agreement by either selling the home or buying out your provider — but homeowners always have the choice to settle early, without prepayment penalty. The Settlement Payment is based on your home’s value at that time.

What is a Home Equity Line of Credit (HELOC)?

A home equity line of credit (HELOC) is a line of credit that allows you to repeatedly borrow against your home equity. You can borrow up to your credit limit, and as those funds are repaid, your credit limit is replenished. A HELOC is a good option for borrowers who don’t know exactly how much they need to borrow.

There are two main phases of a HELOC — the draw period and the repayment period. The draw period lasts 10 years, and during that time, you only have to make interest payments on the loan. The repayment period usually lasts 20 years, and your payments will  increase as you begin to repay both principal and interest. 

Your eligibility for a HELOC and the terms you receive depend on your credit score, income, debt-to-income (DTI) ratio, and total home equity. Most lenders allow you to borrow up to 85% of your home’s equity.

Key Differences Between an HEA and a HELOC

So, how does a home equity agreement work, and how does it compare to a HELOC? The following table breaks down some of the key differences: 

Pros and Cons of HEAs

Understanding the home equity agreement’s pros and cons can help you decide if this funding option is right for you. 

Pros

An HEA can be a good option for homeowners who want to access cash without taking on additional monthly payments. An HEA is often viewed as one of the most flexible loan alternatives for homeowners who need cash without adding new monthly payments.  

The eligibility requirements for an HEA also are different than a traditional loan. This makes them a good option for self-employed homeowners or those with less than perfect credit. And you can use the funds for virtually any purpose while maintaining full ownership and control of your property. 

Cons

Because you’re sharing a portion of your home’s value when you end the agreement, the amount you owe at settlement could be higher if your home appreciates significantly. But many providers, like Unlock, have an Annual Cost Limit that cap what a homeowner would owe in situations of extreme home price appreciation or settlement in the early years.

Pros and Cons of HELOCs

Like any financing product, there are clear HELOC pros and cons to weigh before deciding if it’s how you want to access your home equity. 

Pros

With a HELOC, you can borrow the money on an as-needed basis and only have to repay what you actually spend. HELOCs offer the flexibility of a credit card, but with lower interest rates. Many homeowners opt for a HELOC when they aren’t sure exactly how much they need to borrow. And if you use the funds for a home renovation project, the interest may be tax-deductible.⁷  

Cons

Monthly payments are required, and many HELOCs have variable interest rates, which means your costs could rise if rates increase. Since HELOCs are secured by your home, falling behind on your payments puts your property at risk of foreclosure.

Which One Will Work for You?

When evaluating a HELOC vs. home equity agreement, you should consider your financial goals. For example, an HEA may be best for homeowners who have significant equity but don’t want to take on an additional monthly payment.  If you are comfortable sharing a portion of your home’s value, when you end the agreement, an HEA may be right for you. 

In comparison, a HELOC may be better suited for homeowners who prefer the monthly payments. HELOCs can work well for ongoing projects, like home renovations or education costs, since you can borrow, repay the funds, and borrow again as needed. 

HELOCs do require monthly payments and usually come with variable interest rates. However, they usually offer lower borrowing costs overall, making them a cost-effective choice for borrowers who prefer traditional forms of financing.  

In short, if you want flexibility without monthly payments, an HEA may be a fit. But if you want access to a revolving line of credit and lower overall costs, a HELOC could be the way to go. 

Considering an HEA from Unlock?

For homeowners looking for a HELOC alternative, Unlock’s HEA offers a way to access cash without monthly payments. To explore how much equity you could access and what your future settlement might look like, learn more about how an HEA from Unlock works.