Is Home Equity Sharing a Good Idea?

Key Takeaways:

• Home equity sharing lets homeowners access their equity without taking out a loan or making monthly payments.
• Homeowners will settle the agreement by sharing a portion of their home’s future value.
• This option may work well for homeowners who want to keep their current mortgage rate or avoid another monthly payment.

American homeowners are sitting on record levels of home equity, but traditional methods for tapping into it aren’t always appealing.¹ Cash-out refinances, HELOCs, and home equity loans come with monthly payments, credit requirements, and the prospect of losing a low mortgage rate. If you’re looking for ways to access your equity without those trade-offs, you might wonder whether home equity sharing is worthwhile and how it compares to other options.

What is Home Equity Sharing?

Home equity sharing lets you access your home equity without taking out a traditional loan. Instead of borrowing the money and making monthly payments, you’ll receive a lump sum in exchange for a portion of your home’s future value. This arrangement is also sometimes referred to as a home equity agreement (HEA) or home equity investment (HEI).

So how does home equity sharing work in practice? With an HEA, a company or investor provides cash upfront based on your home equity. In return, the provider receives a percentage of the home’s future value when the agreement ends. Because it’s not a traditional loan, most home equity sharing programs don’t require monthly payments.

When the agreement ends, most homeowners settle by selling the home or refinancing. At that point, the homeowner repays the original investment plus the agreed-upon portion of the home’s value change. If the home has appreciated, the provider receives a larger payout. But if the home’s value has declined, the payout may be smaller depending on the agreement terms.

Most home equity sharing agreements last 10 to 30 years, although the exact terms will vary based on your provider. During that time, you’ll retain ownership of the home but must maintain the property and continue paying your homeowners and property insurance.²

To qualify, homeowners typically need to have significant equity in their property — for instance, Unlock requires a home equity level of at least 30%. Your provider may also require an appraisal to confirm the home’s value.

When Home Equity Sharing Might Be a Good Idea

Many homeowners considering this option wonder when home equity sharing makes sense. In general, it may be a good fit for homeowners who want to tap their equity but don’t want to take on another monthly payment. Unlock recently surveyed more than 2,000 homeowners and found that most want to avoid additional monthly payments at all costs.³ 

Instead of making monthly loan payments, repayment usually happens later when the home is sold or refinanced. That structure can be appealing for homeowners who want access to cash without adding another ongoing expense.

This type of arrangement may also work well for people with fluctuating or unpredictable income, like freelancers or commission-based workers. Plus, Unlock structures their agreements without income requirements, making them accessible to homeowners who might not qualify for traditional loans.

Home equity sharing can also be a good option for homeowners who want to keep their current mortgage rate. If you have a low interest rate, a cash-out refinance means replacing that mortgage with a new loan at today’s higher rates. A home equity agreement allows you to access some of your home’s value without changing the terms of your existing mortgage. 

Home equity sharing is also a good option for homeowners who have a hard time qualifying for traditional financing due to the credit or income requirements. For example, Unlock lets you access your equity if your credit score is at least 500.

When Home Equity Sharing is Not a Good Idea 

Home equity sharing isn’t the right fit for everyone, and it’s important to understand the risks and disadvantages of home equity sharing. These agreements typically last 10 to 30 years, and many homeowners end up settling them by selling the property. If you don’t plan to sell during the agreement term, you’ll need to be prepared to make a large payment – especially if your home appreciates significantly – when the agreement ends.

It may also be a poor option if you’re a new homeowner with limited equity. Most home equity sharing providers require homeowners to have at least 25% to 30% equity in the property to qualify. If you recently purchased your home or don’t have much equity built up, you may not meet those requirements.

Home equity sharing can also be limiting if you need to access a large portion of your home’s value. Many providers cap the percentage of equity homeowners can tap, while some HELOCs and home equity loans allow borrowers to access up to 80% to 90% of their home’s value.

Finally, this option may not be a good fit if you’re uncomfortable with the idea of sharing a portion of your home’s future appreciation. If your home’s value increases significantly, the amount owed when the agreement is settled could be higher than what you might pay with a traditional loan.

Pros of Home Equity Sharing 

Before deciding if this option fits your situation, it helps to understand the pros and cons of home equity sharing:

• No monthly payments: Home equity sharing doesn’t include any monthly payments and instead, homeowners usually settle the agreement later when they sell the home or refinance. For homeowners who want access to cash without adding another bill to their monthly budget, that structure can be appealing. 
• Flexible credit and income requirements: Home equity sharing comes with flexible credit and income requirements compared with traditional home equity loans or HELOCs. Because the provider’s return is tied to the home’s future value, these programs may be more accessible for homeowners with irregular income, self-employment income, or less-than-perfect credit.
• Flexible use of funds: The money can be used for a variety of purposes, like paying off debt, home improvements, educational expenses, or building a financial cushion.
• Faster and easier than refinancing: Since the agreement doesn’t replace your existing mortgage, it may involve less paperwork and fewer underwriting requirements than a traditional refinance.

Keep your current mortgage: A home equity agreement doesn’t affect your current mortgage or interest rate. If you already have a low mortgage rate, this allows you to access some of your home’s value without refinancing into a higher-rate loan.

How Much Does Home Equity Sharing Cost?

Although home equity sharing agreements don’t require monthly payments, there are fees and transaction costs to consider. You’ll typically pay real estate closing costs and origination fees, which can range from 3.9% to 4.9% of the investment amount. Your exact costs will vary depending on your provider, since each company structures its agreement differently. 

With a home equity agreement from Unlock, homeowners receive a lump sum payment in exchange for a certain percentage of their home’s future value. The amount they pay to settle will be based on their home’s appreciation over their 10-year term or whenever they decide to settle.

So, let’s say a homeowner has a home worth $600,000 and decides to tap $60,000 of their home equity, in exchange for a 20% of their home’s future value. Ten years later, the home has appreciated in value to $806,000. If we multiply the home’s value – $806,000 – by the percentage the homeowner agreed to share with Unlock – 20% – the amount owed to Unlock is $161,200. If the home depreciates during the term and falls to $540,000, then the amount owed to Unlock will drop to $108,000. ($540,000 x 20% = $108,000).  (Calculations available in Unlock’s Product Guide).

Keep in mind that most home equity providers include a cap on the maximum amount they can receive when making an investment. These caps help protect homeowners in cases of extreme appreciation and usually range from 18% to 20%, according to a recent research study from the Urban Institute.

Comparing Other Options

So, how does home equity sharing compare to other options? The following chart highlights how traditional loans stack up to home equity agreements.  

If you’re researching your options, you might compare home equity sharing vs. a HELOC, since both allow you to access equity without refinancing your existing mortgage. A HELOC may be helpful for ongoing expenses like home renovations. In comparison, a lump-sum option like a home equity loan or home equity sharing agreement may be better suited for large one-time costs.

Your current mortgage rate can also play a major role in the decision. If you locked in a low rate in recent years, a cash-out refinance could mean replacing that loan with a new mortgage at a higher rate. Whereas options like HELOCs, home equity loans, or home equity sharing allow you to access equity without changing your existing mortgage.

Finally, consider whether you’re comfortable adding another monthly payment to your budget. HELOCs, home equity loans, and cash-out refinances all require regular payments. If avoiding another monthly obligation is a priority, a home equity sharing agreement may be an option to explore.

Conclusion 

If you’re wondering whether home equity sharing is a good idea, the answer depends on your goals and how long you plan to stay in your home. Home equity sharing can be a useful option for homeowners who want to access their home equity without taking on another monthly payment or refinancing their mortgage.

By exchanging a portion of your home’s future value for cash today, you can unlock equity while keeping your current loan in place. But it’s important to understand how these agreements work and what they may cost over time.