What Is a Home Equity Agreement (HEA)?
Key Takeaways
- A home equity agreement allows you to access your equity without taking out a traditional loan.
- Instead of making monthly payments, you’ll repay the investor based on your home’s value when the agreement ends.
- HEAs can be a flexible option, but they require a large final payment when the agreement ends.
- You may want to compare an HEA with alternatives like a HELOC or home equity loan before making a decision.
If you’ve built significant equity in your home, you may be looking for ways to access it. Home equity agreements (HEAs) are a newer financial product that provides a lump sum of cash without requiring you to take out a traditional loan.
However, HEAs work differently than other home equity products, and there are unique risks and trade-offs to consider. Before moving forward, it’s important to understand how HEAs work and whether another solution, like a HELOC, could be a better fit for your goals.
What Is a Home Equity Agreement?
A home equity agreement is a contract where the homeowner receives a lump sum of cash in exchange for a share of the home’s future value. Unlike a traditional loan, an HEA doesn’t require monthly payments. Instead, the amount you repay is based on how much your home’s value changes by the end of the agreement.
The contract typically lasts 10–30 years, unless a triggering event occurs first, like a home sale. You can use the funds for a variety of purposes, including debt consolidation, home improvements, and retirement savings.
However, there are significant risks to consider, like upfront fees and a lien on your property. And because repayment is tied to your home’s value, you could end up repaying much more than the lump sum you originally received. Freedom Mortgage doesn’t currently offer home equity agreements, but you can explore other ways to tap into your home equity, such as a HELOC.
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How Do Home Equity Agreements Work?
If you’re looking for ways to get equity out of your home, an HEA works differently than a traditional loan or line of credit. Instead of borrowing money and making monthly payments, you’ll receive a lump sum in exchange for giving an investor a share of your home’s future value. The repayment amount depends on the terms of your agreement and how much your home’s value changes over time.
1. Meet HEA Requirements
The eligibility requirements vary depending on your provider, but most home equity companies consider the following factors:
- Equity: Most providers require you to have at least 25% to 30% equity in your home after accounting for your existing mortgage balance. The more equity you have, the more likely you are to qualify and receive a larger funding amount.
- Credit score: HEA providers tend to have more flexible credit requirements than traditional loans. Most look for a minimum credit score between 500 and 585.
- Existing debt: Most providers look at your outstanding mortgage balance and other liens to determine how much equity is in your home. Unlike traditional lenders, HEA providers tend to put more emphasis on your available equity than your debt-to-income (DTI) ratio.
- Property type: Many HEA providers will invest in single-family homes, condos, rental properties, multi-family homes, and manufactured homes.
- Property condition: Your home needs to be in good condition, and many lenders have a minimum property value to qualify.
2. Apply and Determine Your Home Value
To apply for an HEA, you’ll typically complete the application and provide documentation about your finances and property. Depending on the provider, this could include proof of income, mortgage statements, and authorization for a credit check. The provider will also have your home appraised to determine its current market value. This valuation and your available equity help determine the amount of funding you’re offered.
3. Finalize Your HEA Agreement
If your application is approved, you’ll receive a final offer outlining the amount you’ll receive, the percentage of your home’s future value being shared, applicable fees, and the repayment terms. Review the agreement carefully so you understand how repayment is calculated and events that could trigger early repayment. It’s a good idea to consult with a financial advisor at this point, as HEAs carry the risk of foreclosure if you fail to produce the funds for the lump sum payment.
If you decide to move forward, you’ll sign the contract and go through closing.
4. Receive HEA Funding
Once closing is complete, you’ll receive the funds via a wire transfer or direct deposit. HEAs don’t typically have seasoning periods, so you can use the funds immediately once the transaction is completed. However, this can vary depending on your provider, so you should review the terms and understand any potential restrictions.
5. Complete Repayment
HEA repayment is one of its defining features and is very different than what most borrowers are used to:
- Repayment is often made as a single lump sum payment, similar to a balloon payment.
- Most agreements have terms lasting 10–30 years, with repayment due at the end, unless any triggering events occur.
- Selling or refinancing your home may require repayment before the end of your agreement.
- Your final settlement amount depends on the terms of your agreement and your home value at the time of repayment.
Pro Tip
Most home equity agreements won’t have monthly payments, but this convenience often comes with high upfront fees and the potential to pay much more than you initially received. Some borrowers may prefer a HELOC, thanks to its consistent and predictable monthly payment structure.
Potential Pros of HEAs
A home equity agreement may offer the following benefits for some homeowners:
- Different qualifications: HEA providers often place greater emphasis on your available equity as opposed to your DTI ratio, credit score, or income. As a result, it can be a good option for homeowners who don’t qualify for traditional home equity products.
- Flexible fund use: Like most other home equity products, there aren’t restrictions on how you use the funds. You can use the money for debt consolidation, home improvements, educational expenses, or other financial goals.
- No monthly payments: HEAs don’t require monthly principal and interest payments. This could improve your short-term cash flow, though you’ll still need to plan for repayment.
The potential advantages of an HEA will vary depending on your circumstances, the terms of your HEA, and how you plan to use the funds.
Potential Cons of HEAs
An HEA requires exchanging a share of your home’s future value for an upfront payment. Before agreeing to an HEA, it’s important to consider the potential drawbacks:
- Risks associated with a lien: Like other home equity products, HEAs typically place a lien on your property. This lien could make it difficult to refinance or sell your home before the end of the agreement. Failing to meet the agreement’s terms puts your home at risk of foreclosure.
- Large final payment: Most HEAs only have one payment, a lump sum when the agreement ends a percentage of the value of the collateral – your property. Despite not charging traditional interest rates, many HEA borrowers find themselves with a final payment far greater than traditional, interest based borrowing costs.
- Upfront Costs: Even though an HEA isn’t a loan, you’ll still have to pay upfront costs to complete the transaction. That may include appraisal fees, inspections, recording fees, and processing fees that cost between 3%–5% of the initial payment.
- Fluctuation based on home value: If your home’s value appreciates significantly, you could end up repaying much more than the initial lump sum you received.
- Maintenance clauses: Depending on the terms of the contract, you may need to uphold certain maintenance standards to help preserve the property’s value. Failing to meet these requirements could affect the terms of your agreement.
While an HEA may be the right fit for some homeowners, you may also want to compare other home equity solutions, including those offered by Freedom Mortgage.
Home Equity Agreement Alternatives
Depending on your financial goals, other home equity products may offer more predictable costs and repayment terms that are a better fit for your budget.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a line of credit secured by your home’s equity. Freedom Mortgage’s HELOC provides a full distribution of your approved funds at closing, and any amount you repay becomes available again for a future draw at the rate in effect at that time.
Cash Out Refinance
A cash out refinance replaces your current mortgage with a new, larger loan amount, allowing you to receive a portion of your equity as cash. A cash-out refi may offer advantages over an HEA, including the opportunity to secure a competitive interest rate and consolidate borrowing into a single monthly payment. Freedom Mortgage offers cash out refinance options to qualified borrowers.
Home Equity Loan
A home equity loan allows you to borrow a lump sum against your available home equity and repay it in fixed monthly payments over a set term. And unlike an HEA, the repayment amount doesn’t depend on your home’s future appreciation. Freedom Mortgage doesn’t currently offer home equity loans.
Final Thoughts: Home Equity Agreements
A home equity agreement can be a way to access your home equity without taking on any new monthly payments, but it does come with trade-offs. Because repayment is tied to your home’s future value, you could end up owing significantly more than you initially received. Comparing an HEA with alternatives like a HELOC or cash-out refinance can help you find the best option. Reach out to Freedom Mortgage today to see what your options are.
Jamie Johnson is a Kansas City-based freelance writer who writes about mortgages, refinancing, and homebuying. Over the past eight years, she's written for clients like CBS MoneyWatch, U.S. News & World Report, Newsweek Vault, and CNN Underscored.
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