If you own your home or have a mortgage, you have equity that you can borrow against. With a home equity agreement (also called a home equity contract), you allow an investor to pay you a lump sum of money in exchange for placing a lien on your home. In return, the investor receives a share of your home's future value. We'll explain the benefits and drawbacks, in addition to other options you have to access your home's equity.

What Is a Home Equity Agreement?

A home equity agreement might seem like an unusual arrangement, but it's a useful option for homeowners who want to tap into their home's value. The contract a homeowner makes with an investor specifies how much money the investor will pay and how much of a return the investor will claim in the future.

Since home equity agreements don't require monthly payments, the investor only sees their return, plus any appreciation, when the homeowner sells the home or within a timeframe specified in the home equity agreement. It's similar to a 澳洲幸运5官方开奖结果体彩网:home equity loan or 澳洲幸运5官方开奖结果体彩网:home equity line of credit (HELOC) in that you typically need to have at least 20% equity in your home to qualify. However, you typically don't need as high of a 澳洲幸运5官方开奖结果体彩网:credit score to qualify for a home equity agreement.

How a Home Equity Agreement Works

Not all home equity contracts are the same, but repayment commonly includes the original amount received plus a percentage of the amount the home has appreciated in value over the duration of the contract. That percentage may be higher for longer contracts. A single repayment is made when the contract is up or after some other triggering event, such as the sale of the home. Unlike a typical loan, the borrower doesn't make regular payments during the length of the agreement. Important aspects of home equity agreements include a home appraisal, how much the investor pays, a lien on the home, the length of the contract, fees, and repayment terms.

Appraisal

Both the lump sum you receive from the investor and the repayment terms are typically based on the value of the home, so once you're approved, the first step is an independent appraisal.

Investment Amount

How much money you receive often is a percentage of the home's appraised value. For example, if the home is appraised at $500,000, you might receive 10% of that, or $50,000.

Lien on the Home

Because the investor is investing in your home, they put a lien on the home for the agreed-upon amount. This is important because it means the investor has a legal claim to your property, which can complicate a future sale of the property or cause you to lose the home if you fail to repay the investor according to the terms of the contract.

Contract Length

The length of the contract determines when repayment is due and also can impact the repayment terms. For example, a 10-year contract means you would need to repay the investor after 10 years. The longer the contract, the higher the percentage of your home's value you might have to pay.

Repayment Terms and Other Fees

This is where home equity agreements can get more complicated because repayment terms vary but usually are tied to how much the home appreciates over the length of the contract. The value of appreciation is unpredictable, which makes the repayment amount also somewhat unpredictable. Hometap, a Boston company that offers home equity agreements, offers tiered repayment amounts based on the amount borrowed and the length of the contract. If you received an investment amount equal to 10% of your home's value, the repayment tiers would be:

• 0–3 years: 15% of the home's value
• 4–6 years: 17.8% of the home's value
• 7–10 years: 20% of the home's value
• Depreciated value: 15% of the home's value regardless of the length of the contract

In addition to these or similar repayment terms you might receive from other companies, you're also responsible for origination, appraisal, and other fees that need to be paid upfront. In some cases, those fees can be deducted from the lump sum you receive from the investor. Point, another company that offer home equity agreements, states that origination fees can be as much as 5% of the investment amount.

Example

Let's say your home is appraised at $500,000 and you receive 10% of that value, or $50,000. If you deduct 5% in fees from that amount, you receive a total of $47,500. Let's also say that your home appreciates in value by 5% per year. After five years, that means your home's value would be about $638,140. Using repayment terms based on Hometap's model, that means you would owe the investment company about $113,589 at the end of a five-year contract.

After 10 years, your home's value would be about $814,447. Still using Hometap's model, that means you would owe the investment company about $162,889 at the end of a 10-year contract.

Benefits of Home Equity Agreements

Home equity agreements have some distinct advantages over other forms of accessing home equity.

No Monthly Payments

One of the biggest selling points of a home equity agreement is that you receive a lump sum payment and don't have to immediately start repaying it. 澳洲幸运5官方开奖结果体彩网:Personal loans like home equity loans and lines of credit require monthly payments, so a home equity agreement is a good option if you don't want to stretch your monthly budget.

No Interest

Again, unlike personal loans, you aren't charged interest on the money you receive from the investor. Instead, you pay back the original lump sum, plus an additional percentage of your home's appreciated value. This is ho🧔w the investor is able to profit from the transaction.

Flexibility in How You Use the Funds

Unlike some personal loans that specify how funds must be used to buy a home or pay for education, you aren't required to use the home equity agreement money for anything in particular (unless your investor requires that you pay down some of your other debt with the funds).

This gives you the flexibilit𝕴y to put the money toward things l🦩ike:

• Home improvement projects
• Education
• Medical debt
• Paying for large purchases
• Consolidating or paying down debt
  

Minimum Credit Score Required

Since home equity agreements are structured differently than a home equity loan or line of credit, you typically don't have to have as robust of a credit score. In fact, several companies that specialize in home equity agreements are willing to work with homeowners who have 澳洲幸运5官方开奖结果体彩网:credit scores of 500 or more. This means getting a home equity agreement can be easier than getting a home equity loan or line of credit.

Drawbacks of Home Equity Agreements

The Consumer Financial Protection Bureau (CFPB) urges homeowners to be aware of the drawbacks and potential risks of home equity agreements. Primarily, the CFPB suggests caution because the investor would hold a lien on your home, which reduces the control you have over your property.

Potential Taxes

One of the perks of home equity loans and lines of credit is that you can 澳洲幸运5官方开奖结果体彩网:deduct the taxes on the loan if you use the money to buy, build, or substantially improve your property. Home equity agreements come with no such tax benefits, even if you use the funds for similar purposes. Be aware that states also handle home equity agreements🔴 differently when it comes to taxing home equity contracts, so read your paperwork carefully.

Related Upfront Costs

A home equity agreement might sound less official than a home equity loan or line of credit, but you'll also be charged various costs when taking out a home equity contract. For example, you may have to pay an appraisal fee, an origination fee, title insurance, recording fees, and more. Before you sign any paperwork, take a look at the upfront costs so you know how much you're expected to pay now (and when repayment is due).

It Can Be Expensive

Betting on the housing market is always risky, and it's a risk you take when you get a home equity agreement. If your home becomes significantly more valuable over the course of your agreement, you'll likely end up paying more than anticipated because the investor will get a larger cut of the home's increased value. In some cases, you could end up paying more with a home equity agreement than you would with a home equity loan if your home appreciates quickly.

Balloon Payment Required

As most homeowners know, it can be difficult to come up with a large down payment. Now, imagine you sell your home or the end of the contract comes up. You'll be required to repay the initial lump sum all at once. This is known as a balloon payment—a large, one-time payment at the end of a loan 💟or contract. Plus, you'll have to pay the investor their agreed-upon share of your home's value, which could be substantial.

Comparing Home Equity Agreement Companies

Many lending companies offer home equity agreements, but you shouldn't choose the first company you find. Instead, research providers and compare their contracts. Specifically, you should consider these factors when picking a company:

• Terms offered
• Fees and potential penalties
• Transparent terms
• Customer support availability
• Customer satisfaction reviews

If in doubt, ask a trusted financial advisor for recommendations.

Alternatives to Home Equity Agreements

If you want to access your home's equity, you do have other options. We've already mentioned home equity loans and lines of credit. These offer a lump sum of money or a revolving line of credit, respectively, that uses your home as collateral. You'll generally have to make steady repayments, which can help you avoid a balloon payment. However, these may be harder to qualify for.

You also could shop around for a personal loan that has better terms than a home equity agreement. Personal loans and 澳洲幸运5官方开奖结果体彩网:reverse mortgages typically have fixed terms, so the amount you'll be repaying shouldn't come as a surprise. Repaying personal loans also can help improve your credit if you make regular, on-time payments.

The Bottom Line 

If you need access to funds and have significant equity in your home, a home equity agreement can be a useful way to get the money you need without signing up for monthly payments or selling your home. In many ways, everyone wins when your home's value appreciates—the investor gets a good return and you can enjoy cashing in on your equity. However, a home equity agreement isn't right for everyone, and it may even be an expensive option. Before agreeing to one, consult with a financial advisor who can walk you through the pros and cons specific to your situation.