If you need cash and most of your wealth is tied up in the value of your home, one solution is to apply for a home equity line of credit, or HELOC. But if you don’t meet lender requirements for a HELOC, you might consider getting a home equity investment, also called 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 percentage of the future value of the property.
In other words, if the value of your home goes up, a big part of that growth belongs to the investor. Instead of putting home equity toward, say, your next home purchase, you’ll forfeit a (likely substantial) percentage of it to the company.
Home equity investments may interest homeowners who are cash poor or can’t get approved for a secured loan. A home equity loan or HELOC is often a better choice for qualified homeowners who can afford monthly payments.
How home equity investments work
Home equity investments differ from mortgages and home equity loans because you don’t make a monthly payment or pay interest. Instead, at the end of the agreement term, you pay back the company the loan it gave you, as well as a percentage of any appreciation in your home’s value.
When the loan term ends, you can owe a lot more than you borrowed — in some cases, hundreds of thousands of dollars.
Imagine you receive a $50,000 home equity investment when your home is worth $500,000. As part of the agreement, the company is entitled to 40% of your home's future increase in value. Ten years later, your home's value has grown to $765,000, an increase of $265,000. The company would receive its original $50,000 investment back, plus 40% of the $265,000 increase ($106,000). In total, you would repay $156,000 when the agreement ends.
This is why home equity investments can become costly. Instead of paying interest, you repay the original investment plus an agreed-upon share of your home's appreciation. If your home's value rises significantly, your repayment can be much higher than the amount you originally received. You can shop around with home equity loan lenders to find a significantly better rate.
Home equity investment requirements
To receive a home equity investment, you’ll typically need:
- A minimum of 25% to 30% equity in your home
- A credit score of at least 500
- An eligible property type (single-family homes, condos, townhomes, and 2-4 unit properties)
- A home that serves as your primary residence, though some providers allow second homes or investment properties under stricter terms
- Residency in an eligible state
- Funds to cover processing fees and closing costs
Some home equity investment companies set a minimum property value, while others have limits on the investment amount itself. For instance, Unlock requires a $175,000 minimum property value, and Hometap will provide investments anywhere between $15,000 and $600,000.
How to get a home equity investment
- You request a pre-qualification estimate. The estimate is roughly how much cash you could receive now in exchange for part of the future value of your home.
- You’ll get a home appraisal to determine your property’s value. That value may be low-balled by the investor to offset their own risk, meaning the amount of equity you owe them at the end will be inflated.
- If you qualify, the company advances you that money. 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 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.
Pros and cons of home equity investments
For select qualified borrowers, a home equity investment can be the most manageable option for accessing cash. For most homeowners, however, the advance they receive may not be worth the equity they’ll have to give up later.
Pros
No monthly payment or interest. Access your home’s equity now, with nothing to repay for years.
Home equity investments are usually easier to qualify for than HELOCs or home equity loans.
Cons
You have to pay the loan back all at once. If your finances don’t improve, you (or your heirs) may need to sell your home to make the balloon payment at the end.
Higher long-term cost. You’ll probably repay much more than what you would have paid in interest on a HELOC or home equity loan.
What does a home equity investment cost?
In a home equity investment, the homeowner is required to pay fees and closing costs that may include:
- An appraisal
- Processing fees (typically 3.9% to 4.9% of the investment amount)
- State taxes and recording fees
Together, these costs can reduce the funds available for your use by thousands of dollars.
According to the Consumer Financial Protection Bureau, processing fees are often between 3% and 5% of the investment amount.
How repayment works
Each home equity investor calculates your repayment differently. However, in general, these are the possible scenarios:
If your home increased in value. You’ll repay the amount you originally received, plus a share of the home’s increased value. The more your home gained in value, the more you'll owe.
If your home’s value remained the same. You’ll repay the equity you received. Remember, if the company low-balled the initial value than its actual market value, you could still owe more than expected. For example, if your home was worth $250,000 at the start of the term, but the investor valued it at $225,000, the $25,000 difference may be treated as appreciation. That means you could owe the investor a share of that amount, even if your home is still worth $250,000 at the end of your agreement.
If your home decreased in value. You'll repay the equity you drew, minus an adjustment for the depreciation. Since the company's payout is tied to your home's value, a decline in price can reduce what you owe. In some cases, the repayment could even be less than the amount you originally received, depending on the terms of your agreement.
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 can afford to wait to tap your equity, you can explore options for polishing your credit score to qualify for alternative home equity products.
Also, entering a home equity sharing agreement may complicate your ability to refinance your mortgage. Consider your timeline and evaluate all potential options before committing to this product.
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