7 Questions to Ask If You’re Considering a Home Equity Agreement

Key Takeaways

• A home equity agreement (HEA) can be a good idea for homeowners who have substantial equity in their homes and want to avoid taking on another monthly payment. 

• HEA requirements for income and credit are more flexible than requirements for traditional loan products. 

• Asking yourself a few questions about your needs and finances will help you determine if an HEA is a smart choice for you. 

Tapping your home equity can be a good way to obtain funds to pay off debt, fund home improvements, cover education expenses or handle large, needed purchases. To obtain those funds, you have several options: a home equity loan (HEL), a home equity line of credit (HELOC), a cash-out refinance, a reverse mortgage (for homeowners age 62 and up) or a relatively new financing method, a home equity agreement (HEA).  

In this guide, we’ll dive into home equity agreements or home equity investments (HEIs) as they are also known, and offer some guidance about how to determine if this relatively new form of debt financing could be a good method of accessing your home equity.

How a home equity agreement works

If you’re looking at ways to access your home equity, it’s important to understand how a home equity agreement works.  

An alternative to traditional loans, like a HELOC or HEL, an HEA lets you obtain cash up front in exchange for a portion of your home’s future value. During the term of the HEA – which can range from 10 years to 30 years, depending on the provider – there are no monthly payments. You continue to live in your home as usual, and remain responsible for all housing expenses, including mortgage payments, homeowners’ association fees, insurance and property tax payments. 

Many homeowners end, or settle, their HEA when they sell their home, but you can also end it anytime within the term. Some providers, like Unlock, also give homeowners the option to do partial buy-back of their equity at any time during the term. When you settle, your HEA provider will receive a percentage of the proceeds as outlined in your agreement.  

As with any financial product or service, not every option is right for every person. The following questions will help you evaluate whether an HEA could be a good idea for you. 

1. Do you have substantial equity in your home?  Home equity is a measure of how much of your home you own outright. To calculate your home equity, you take the difference between the market value of your property and subtract any outstanding loans you owe on the property. Home equity increases when the market value rises and as you make monthly mortgage payments, paying down your mortgage balance. 
   
   If you have owned your home for a while, you may be sitting on a wealth of untapped home equity –  about $300,000 on average per household, according to real estate data firm Cotality. When tapping that equity through a traditional loan, you typically need 15% to 20% equity to qualify. The requirements for a home equity agreement or home equity investment are usually higher.  While the qualifications vary from provider to provider, Unlock requires homeowners to have 30% equity in their homes to obtain an HEA.
   
2. How much funding are you looking for? The answer to this question can help determine which route is best for accessing your home equity. HEA providers typically offer homeowners access to between $15,000 and $600,000, depending on their eligibility. If the amount you’re considering falls within that range, an HEA could be a good match. If you need only $5,000 or $10,000 to handle some home repairs or pay off debt, an HEL or even a personal loan might make more sense.
    
3. Are you already managing a lot of debt? If you’re already juggling a variety of monthly bills and debt payments, adding another payment to your obligations may leave you feeling overwhelmed. HEAs let you access the funds you need without additional monthly payments. Many homeowners use their HEA funds to pay off existing debt, move their finances forward, and start creating the future they envision. 
    
4. Is your income unconventional or variable? If you are self-employed, if you work on commission, if you’re retired, or if your income is fluctuating or limited in any other way, qualifying for a traditional loan can be difficult given typical requirements. Most HEA/HEI providers don’t require proof of income to qualify. And for someone who is retired and living on a fixed income, an HEA can be a smart idea for tapping home equity without taking on another monthly payment. 
    
5. Is your credit score below traditional lending requirements? Many lenders require credit scores in the mid-to-high 600s to qualify for a cash-out refinance, HEL or HELOC. Plus, credit scores play a big part in the interest rates lenders offer on these conventional options, with the highest rates going to those with the lowest scores. HEA requirements are more flexible since the main criteria is the amount of equity you hold in your home. 
   
6. Are you planning to sell your home in the near future? If a sale is slated for the near future, it may make sense to cash out your equity when you sell, rather than accessing it through a loan or replacing your mortgage in a cash-out refinance. If you need cash to make home repairs before the sale and have good credit, you could consider a personal loan.   
    
7. How quickly do you need access to cash? If you’re operating on a short timeline, an HEA may be worth a closer look. With more flexible credit and income requirements and less paperwork, the HEA application process is more streamlined than that of traditional loans. While timeframes will vary based on the HEA provider and homeowner, you can often receive funds 30 to 60 days after submitting your application.  
   

Dive deeper into the seven questions in this video.

Conclusion 

Determining the best way to access your home equity is a big decision. It’s important, as with any financial transaction, to carefully consider your options before moving forward. 

If you have built up a substantial amount of equity in your home and you’re searching for a way to access it, an HEA could be a smart idea. An HEA might be especially worthwhile if you don’t want to add another monthly payment to your budget right now, if you have limited or fluctuating income, or if your credit score might not qualify you for a traditional loan at the best rate.  

Find out how much equity you can access from Unlock – without monthly payments or added debt.