Understanding the terms in a HEA is essential for making informed finance decisions.
The core function of a HEA is to purchase a portion of the future value in a home in exchange for liquid, cash proceeds.
Homeowners retain occupancy rights for their home under a HEA. They are also responsible for all other obligations toward the property (e.g., mortgage, property taxes, repairs).
Ending an HEA may take place through an owner buyout or by selling the property.
A survey from ProPrivacy shows that many people (99% of those surveyed) fail to read the fine print when agreeing to terms for a product or service. However, understanding the key terms of a financial product, including a home equity agreement (HEA), can help in responsible management of financial affairs.
A HEA provides an alternative financing option for homeowners with home equity and limited liquidity. Here, we explain some of the main terms you may see in these agreements.
Your education in HEAs starts now.
While the precise terms of a HEA may vary from person to person, the fundamental premise of these agreements remains the same. The homeowner (the seller) sells a percentage of equity to the HEA provider, reflected as a percentage of the home’s appraised value. In return, the buyer provides the homeowner with net cash proceeds to use freely toward purposes that might include:
Repaying other high-interest debts and financial obligations (e.g., credit cards, auto loans)
Paying for a child’s school tuition
Making necessary renovations or home improvements
-Securing a down payment on another house or vacation property
The overall purpose of a HEA is not unlike a home equity loan or home equity line of credit as far as it taps into a home’s equity. The key difference is that a HEA is not a loan. Therefore, there’s no monthly repayment of interest and principal over a predetermined term. Instead, the homeowner benefits from receiving cash up front, and flexibility in how they end the HEA.
You may wonder how a HEA company may calculate the key terms of an agreement: the equity interest percentage and the offered cash proceeds. Generally, the calculation is determined from the value an independent appraisal gives the home, and factors including:
The amount of any pre-existing debt on the property (e.g., mortgage, home equity loan, home equity line of credit, or other loans in which the property is collateral
Homeowner’s credit history
Homeowner’s use of the property (e.g., owner-occupied versus rental)
The maximum amount a homeowner may generally be eligible to receive through an HEA varies by HEA provider, but can be up to $500,000.
Other obligations on a property continue throughout the HEA term. These may include continued payment of the following:
Homeowners’ association (HOA) fees
Local and/or state property taxes
Additionally, the homeowner will maintain responsibility for the general care and upkeep of the property, including payment for associated costs. In other words, obligations connected to the property continue as usual.
Other HEA terms to know
HEAs can be complex contracts. In addition to the core elements, these agreements will likely contain other terms. While these terms may vary from agreement to agreement, here are some you may see.
Restrictions on use of cash proceeds
Depending on the homeowner’s financial situation, a HEA provider may require that some of the cash value received repay other debts. However, the repayment will usually happen through escrow channels, which means the net cash received (i.e., after escrow closes) will be the homeowner’s to freely use.
Title to property and right of occupancy
The homeowner will retain the title to their property, and will have exclusive rights of occupancy. This means the HEA provider will not have its name on any recorded deed. Nor will they have the right to enter and occupy the home. Rather, the HEA provider may file a financing statement with the state where the property exists to indicate its security interest in the house.
Keeping the increased value from home improvements after entering a HEA will depend on the precise terms of the contract. Some HEA providers – like Unlock – may offer what is known as an improvement adjustment to make sure that homeowners who make improvements keep the value created with the improvements.
In an improvement adjustment, an independent appraiser will determine the amount that the improvements add to the value of the home when it comes time to end the HEA. The HEA provider then reduces the ending value of the home by that amount, so that the HEA provider’s share is based on the home’s value without the improvement value.
Terms may also exist that limit the application of any improvement adjustment.
One of the most important things for homeowners with a HEA to understand is how their agreement will end. HEAs usually have fixed-term lengths (commonly 10 years). Homeowners will have within that amount of time to either buy out the HEA provider – called an “owner buyout" – or sell their home and distribute sale proceeds accordingly.
An owner buyout requires an appraisal to determine the ending home value. An escrow company will then transfer funds and release any property liens to end the HEA.
A thorough understanding of the terms of a HEA is important for making an informed financial decision. Unlock’s FAQ page provides additional details for homeowners about general agreement terms along with information about the process, from start to finish.
If you’re curious about a HEA through Unlock, you can enter a few details in the online form to see your potential eligibility and terms.
Contact Unlock today for questions about a home equity agreement.
Our goal is to enrich lives.