What Is a Home Equity Sharing Agreement?

If you need to tap your home’s equity for cash, one solution is to apply for a home equity line of credit, or HELOC. But if you don’t meet the lender requirements — say, for example, your credit score is below the standard threshold of 620 — you might think about entering a home equity sharing agreement.

This unique product allows you to cash out some of the equity in your home in exchange for giving an investment company a minority ownership stake in the property. While the company doesn’t have access as a tenant and can’t lease out the home, it participates in the increase, or decrease, in the value of the property.

Offered by companies such as Hometap, Point, Unison and Unlock, shared equity agreements differ from mortgages and home equity loans because you don’t make a monthly payment or pay interest. Instead, at the conclusion of the agreement term, you pay back the company the equity advance it gave you as well as a percentage of any appreciation in your property value. This can amount to a significant payment — in some cases, more than double or even triple the amount of the original loan.

If the home’s value does not go up or if it goes down, the company will take an adjusted share of the sale price, which can be less than what you received upfront; however, you’ll also be working with a smaller reserve from the home sale to pay the company back.

These products primarily target homeowners who are home equity rich but cash poor or those with credit or debt challenges that would hinder their ability to get approved for a secured loan. Well-qualified homeowners with the cash flow to make monthly payments are often best served by traditional home equity loans or HELOCs.

How a home equity sharing agreement works

• You request a pre-qualification estimate from a company that issues home equity sharing agreements. The estimate is roughly how much cash you could receive now in exchange for part of the future value of your home.

• The home equity sharing company will prompt you to get a home appraisal to determine your property’s value.

• If you qualify, the company advances you that money. While they technically own a portion of your home, the company has no occupancy rights. Instead of paying interest, you agree to give the investment company a percentage of the future appreciation of your home.

• You make no monthly payments to the company.

• When you come to the end of the agreement term (often 10 but up to 30 years) or you decide to sell the house, you pay back the equity value the company gave you plus its share of the home’s appreciation.

» MORE: Best HELOC lenders

Pros and cons of home equity sharing agreements

For select qualified borrowers, a home equity sharing agreement can be the most manageable option available for accessing cash. For most homeowners, however, the advance they receive may not be worth the equity that they’ll have to give up later.

Pro: No monthly payment or interest

Arguably the biggest benefit of a home equity sharing agreement is that you won’t be making a monthly payment. For borrowers who have a lot of debt or limited cash reserves that couldn’t cover a consistent loan payment, this can be a way to access their wealth immediately without having to pay it back for several years.

This is a unique payment structure among home equity products. Home equity loans, for example, require you to start making monthly payments right away. Although HELOCs have a typical 10-year period when you can draw from the line of credit before you’re required to make payments toward the principal, you’re still required to pay interest on funds you withdraw during that time.

Because home equity sharing agreements require a full payment at the end of the agreement instead of a monthly payment, they make the most sense for borrowers facing temporary financial difficulties — for example, a homeowner who has reduced their work hours to care for a parent at the end of life might use an equity sharing agreement to supplement lost income.

Con: You have to pay all at once

A home equity sharing agreement is somewhat like a balloon-payment loan — the end of the term looms large. If your financial situation is not the result of a short-term setback and is unlikely to improve, the barriers that make a monthly payment untenable now could make the total payment at the end of the agreement impossible — at least, not without selling your home. You’re facing a deadline to pay back the entire investment and a percentage of your home’s appreciation. If you die, your heirs will have to conclude the agreement by selling the property or paying out the company’s share. That is no small consideration. For that reason, these agreements are not for risk-averse borrowers who want to protect their assets.

Pro: It’s easier to qualify

Home equity sharing companies can have more lenient requirements than traditional HELOC or home equity loan lenders. Unlock and Hometap, for example, have a minimum credit score requirement of 500, while borrowers may have a hard time getting approved for a HELOC or home equity loan with a score under 620. These companies can also have flexible income requirements or sometimes no income requirements.

Note that borrowers may need to meet additional criteria, like a minimum draw amount.

Con: You’ll likely pay much more than you get

By signing away a percentage of your future appreciation, you could be paying the company far more for the upfront cash than what you would pay a lender for a HELOC or home equity loan.

By Point’s estimation, for example, the owner of a $500,000 home who borrows $50,000 and sells the home in 10 years for $593,800 would be expected to pay the company $72,100 in appreciation plus the original $50,000 loan.

If that same borrower had gotten a home equity loan for $50,000 at a 10% interest rate and paid it back in 10 years, they would have paid the lender $29,424 in interest payments. This would require the borrower to be capable of making a $662 monthly payment, but the overall savings are significant.

You also won’t be able to borrow as much with a home equity sharing agreement as you could with a home equity loan or HELOC. Unison, for instance, allows customers to borrow only up to 15% of their equity. HELOC lenders, meanwhile, typically allow borrowers to tap at least 80% of their equity.

» MORE: HELOC rates and lenders

What does a shared equity agreement cost?

In a shared equity agreement, the homeowner is required to pay for an appraisal, as well as a transaction or origination fee, plus costs associated with title and escrow, title insurance, state taxes, notary and recording fees, among others. Together, these costs can deduct thousands from the funds available for your use.

For instance, Unison and Hometap charge a 3% transaction or origination fee, and Unlock charges 4.9%.

An appraisal will determine the value of the home, but that value may be discounted by the investor for risk purposes.

Unison, for example, reduces the appraised value by 5%. So if your house is appraised for $400,000, the risk-adjusted amount would be $380,000. The fact that the company discounts your home’s value from the beginning of the agreement can mean you start off owing more than you received from day one, no matter how your property’s value changes.

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How repayment of the equity investment works

Each shared equity investor calculates the outcomes a bit differently. However, in general, these are the possible scenarios:

• If the home appreciates, you pay back the company’s “investment” in your home — the equity you received — plus its stake in the increased value.

• If the home’s value remains the same, you’ll pay back the equity you drew, and you may also pay back any risk-adjusted discount that the investor took. To protect their investment, these companies will often reduce the amount of your home’s appraisal. Point, for example, will assess the value of your home for 25.5% to 29.5% less than it really is. This way, even if your home’s value remains the same, the sale price is higher than the appraised value — meaning they still get a share of this “appreciation.”

• If the home loses value, you'll pay back the equity you drew, less an adjustment for the depreciation. The company is taking a percentage of the sale price of the home, so if the value has gone down, their share could be less than the advance you received.

Repayment may occur:

• Before the agreement ends, if the investor allows for it. Unison permits homeowners to buy out within the first five years, although the company won’t share in any losses if you opt out early.

• If you previously weren’t eligible for a home equity loan, line of credit or a cash-out refinance but your financial circumstances have changed since you entered the agreement and you would now qualify, you may be able to use one to settle the agreement.

• When you sell the home before the agreement’s completion.

• When you reach the end of the agreement’s term. At that point, you’ll have to sell, refinance or otherwise find the money.

» MORE: Home value estimator

Where to get a home equity sharing agreement

The options available to you will depend in part on where you live. You should compare the details of various offers because they vary from company to company.

Hometap is available in 18 states: Arizona, California, Florida, Indiana, Michigan, Minnesota, Missouri, Nevada, New York, New Jersey, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia and Washington and Washington, D.C.

Point serves customers in 25 states and Washington, D.C.: Arizona, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia and Washington.

Unison has the largest geographic coverage, in 29 states and Washington, D.C.: Arizona, California, Colorado, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington and Wisconsin.

Unlock is available in 14 states: Arizona, California, Florida, Michigan, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia and Washington.

Consider all your options

Depending on the amount of money you need and what you plan to use it for, a personal loan, home equity loan or HELOC may be a better option. If you’re trying to pay for a major home improvement, such as a new roof or replacing all the windows, you may want to consider a contractor that offers loan financing.

If you can afford to wait to tap your equity, you can explore options for polishing your credit score to qualify for alternative home equity products.

Home equity sharing agreements are geared toward homeowners who plan to stay in their homes for an extended period of time, and they may not fit with other types of loans you may have or want to take out. For example, these agreements may not be available to borrowers who have reverse mortgages, interest-only loans, other shared appreciation loans or any loan with negative amortization.

Also, you may not be able to refinance a home loan after entering a home equity sharing agreement, so you should consider your timeline and evaluate all potential options before committing to this product.