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A home equity sharing agreement 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, Noah, 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 the appreciation in your property value.
These products primarily target homeowners who are home-equity-rich but cash poor, or with credit challenges. Well-qualified homeowners are often best served by traditional home equity loans and home equity lines of credit, or HELOCs.
How a home equity sharing agreement works
You want to tap the equity in your home.
If you qualify, a home equity sharing company advances you that money.
Instead of borrowing at a particular interest rate, you agree to give the investment company a percentage of the future appreciation of your home.
You make no monthly payments to the company.
The company has no occupancy rights, but there is a lien against your property, just as with a typical loan.
You pay back the equity value the company gave you, plus its share of the home’s appreciation when you sell the house, or at the end of the term of the agreement, often 10 years. Unison’s agreements are for 30 years.
Typically, you also have the option to pay back earlier.
For all practical purposes, a home equity sharing agreement is a lot like a balloon-payment loan. The end of the term looms large. You’re facing a deadline to pay back the entire investment and a percentage of your home’s appreciation. That is no small consideration. For that reason, these agreements are not for the risk-averse or the faint of heart.
How is this different from a HELOC?
Home equity sharing agreements and HELOCs are two ways to access the equity in your home without having to sell it. However, they are structured very differently, and each benefits a different sort of homeowner.
A HELOC is a second mortgage that allows you to draw cash from your home as needed, up to a certain percentage of your equity. During the “draw” period, which typically lasts for 10 years, you can take out money as needed and make payments only on the interest. After that time, you'll enter the repayment period, and you’ll pay both interest and principal. You can see current average HELOC rates here.
A home equity sharing agreement, on the other hand, works more like an investment for the lender. You receive the financing, while the lender takes a portion of the earnings that come from the home’s appreciation.
While it may seem like the lender is taking on more risk here because its eventual total payment isn’t initially clear, keep in mind that homeownership is considered one of the best paths toward building wealth. Although you’re not making monthly payments as you would with a HELOC, you are effectively selling off some of your own future earnings.
Because of this risk, home equity sharing agreements are likely most beneficial to those who have a lot of equity in their home but have liquidity problems or wouldn’t otherwise qualify for a HELOC. Even so, you will need a credit score of at least 500 to qualify for an agreement through Hometap. Noah requires a score of at least 580, while Unison requires an even higher score of 620 or more.
Another significant difference is the fees associated with a shared equity agreement, which are more extensive than with a HELOC. And while the investment structure will differ from company to company and may vary depending on the initial value of your home, the overall funds you can receive will likely be less than with a home equity loan or HELOC.
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, Unlock and Hometap all charge a 3% transaction or origination fee; Noah and Point both take a 3% processing fee from the equity draw.
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 2.5%. So if your house is appraised for $400,000, the risk-adjusted amount would be $390,000. This adjustment can be higher with other lenders, such as Point, which applies a 15% to 20% reduction. The fact that the company discounts your home’s value from the very 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.
You may end up getting a payout of somewhere between 5% and 20% of your home’s equity — less than you’d typically be able to get from a HELOC, which usually allows you to tap into as much as 80% of your equity or more.
Unlock allows you to access up to $500,000 of your equity if the home’s value is near or greater than $1.15 million, but it may require up to 70% of your home’s future value in return.
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.
If the home loses value, you'll pay back the equity you drew, less an adjustment for the depreciation.
Repayment may occur:
Before the agreement ends, if the investor allows for it. Unison permits homeowners to buy out after five years, although the company won’t share in any losses if you opt out early. Noah allows you to end the agreement at any time, and it’ll require another appraisal to determine the amount you’ll have to pay to buy it out.
Before the agreement’s term ends, perhaps by qualifying for a cash-out refinance with another lender, if the agreement allows refinancing.
When you sell the home prior to the agreement’s completion.
When you reach the end of the agreement’s term. At that point, you’ll have to sell, refinance or find the money.
Where to get a home equity sharing agreement
The options available to you will depend in part on where you live. You should carefully compare the details of various offers, as they vary from company to company.
Hometap is available in 18 states: Arizona, California, Florida, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia and Washington.
Noah operates in California, Colorado, Massachusetts, New Jersey, New York, Oregon, Utah, Virginia and Washington, as well as Washington, D.C. (Note: As of March 24, 2022, Noah paused on accepting new applications.)
Point serves customers in 16 states and Washington, D.C.: Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Virginia and Washington state.
Unison has the largest geographic coverage, in 28 states and Washington, D.C.: Arizona, California, Colorado, Delaware, Florida, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, 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 15 states: Arizona, California, Colorado, Florida, Michigan, Minnesota, Nevada, New Jersey, North Carolina, Oregon, 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.
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 already have or want to take out. Unison, for example, says it can't work with 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 carefully consider your timeline and evaluate all potential options before committing to this product. If you’re short on cash because of high mortgage costs, a cash-out refinance may be a better path for you.