Is a Home Equity Agreement a Good Idea?

Own a home but need some significant cash? You could tap into your equity and pursue a home equity loan, home equity line of credit (HELOC), or cash-out refinance to access extra funds. But one alternative worth considering is a home equity agreement (HEA). This can yield a lump sum of cash upfront from a company or investor in exchange for a share of your home’s future value when you sell or refinance.

But are home equity agreements worth it? Do the benefits outweigh the disadvantages? What happens if your property depreciates or you want to get out of an HEA?

What Is a Home Equity Agreement, and How Does It Work?

An HEA, also called a home equity investment or shared equity agreement, is an arrangement whereby you, the homeowner, receive a lump sum of money upfront from a business or investor in exchange for a portion of your property’s future value or appreciation.

It’s actually not a loan, and there are no interest or monthly payments involved. Instead, you must repay the original lump sum amount given plus the other party’s share of property appreciation when you sell or at the end of the agreement (usually within 10 to 30 years).

If your home’s value doesn’t increase, you are only on the hook for repaying the original amount thanks to built-in protections woven into many HEAs.

Home equity agreements require no payments because this is essentially an investment without taking on new debt. The HEA investor or company is taking a risk that your property’s value will increase.

HEA Example

According to a cost estimator from HEA firm Point, following is a payback example.

Point estimates that this is equivalent to a 9.1% annual interest rate over 10 years, though it points out that an HEA does not charge interest, and there’s no monthly payment.

Who Are Good Candidates for a Home Equity Agreement?

Worthy prospects for HEAs include homeowners with solid equity in their properties but who struggle with traditional borrowing.

“This often means retirees, self-employed individuals, or those recovering from credit issues who still need cash,” notes Baruch Mann, a personal finance expert and CEO of The Smart Investor. “If you want to avoid new monthly debt, especially with interest rates near 7%, this approach keeps your monthly budget steady. It’s also useful during uncertain times when lenders are strict and home prices are still relatively high in some markets – allowing you to unlock value without selling your home.”

What Are the Pros and Cons of HEAs?

Getting cash without payments is the prime benefit of an HEA, according to Paul Ferrara, a senior wealth counselor at Avenue Investment.

“This can be useful during periods of high interest rates when debt instruments like HELOCs or second mortgages are costly,” he says. “The drawback, however, is that you forgo some future increase in your property, which in some markets would be more expensive than conventional borrowing.”

Here’s a breakdown of the benefits and drawbacks of using a home equity agreement:

HEA hypothetical

Let’s explore another HEA scenario, this time involving a $700,000 home. You enter into a $100,000 home equity agreement with the private investor.

“Say your house later sells for $900,000 and the investor is entitled to 25% of the increase,” adds Ferrara. “Your profit from the home sale would be $200,000. At the time of sale, you would owe the investor the original $100,000 they gave you, plus 25% of the $200,000 profit, which equates to $50,000.”

Differences From a Traditional Mortgage or HELOC

The good news is that HEAs charge no interest, unlike a traditional mortgage or HELOC. Consider that a HELOC or home equity loan charges around 8% to 9% interest currently. But the bad news is that a home equity agreement can cost you more long-term via shared appreciation.

“Imagine you need to borrow $100,000,” says Steven Glick, director of mortgage sales for HomeAbroad. “You pursue a 20-year HELOC at a variable rate that averages around 8.5%. Over the 10-year draw period, when you will pay interest-only initially, it will cost you around $8,500 per year in interest – $85,000 total over 10 years, plus your principal. Full amortization might run you $864 per month. Compare that to an HEA, where there is no monthly cost. But if your $700,000 home appreciates at 4% per year, and the HEA company takes 20%, you will pay back the $100,000 you borrowed plus $67,234.”

Comparing apples to apples, in this example you would pay $207,360 total for the HELOC versus $167,234 for the HEA.

When to Use an HEA

A home equity agreement can come in handy, especially if you need to avoid foreclosure. But it doesn’t have to be a last-resort option. Many homeowners use them strategically.

“They are now used for things like major renovations, paying off high-interest debt, or even launching a business. And if you are struggling to keep up with mortgage payments, they can provide breathing room without more monthly bills,” says Mann. “But they also appeal to those who don’t want the pressure of loans, especially now when rates are making HELOCs expensive. At a time when income is stretched and credit is tighter, home equity agreements offer flexibility for both financial relief and planned investments.”

Mann points out that using an HEA for more typical expenses like home upgrades can be smart.

“For example, if a $40,000 renovation boosts your property value by $60,000, you may come out ahead even after paying the investor their share. It’s a smart play if you don’t want loan payments during a time of high interest and rising living costs. Just be sure your improvements are likely to increase your home’s resale value and not just your lifestyle,” recommends Mann.

Can You Get Out of a Home Equity Agreement Early?

Fortunately, you can end an HEA early by buying out the agreement via a cash payment or by refinancing your mortgage to cover the payoff amount (the original cash given to you plus any owed appreciation based on a new appraisal).

“Some companies allow partial buyouts if you want to reduce their share over time,” notes Glick. “Refinancing works well if rates are low and your equity has grown, but having a lien on your property means you will need lender approval.”

Mann says it’s best to exit the agreement early if home values start rising quickly or you want to retain full ownership.

Home Equity Agreement FAQs

Can an HEA lender foreclose if you cannot pay them back at the end of the contract term or home sale?

In general, the investor or HEA company cannot foreclose on you because there’s no default on payments. However, if you breach your contract – such as by not paying property taxes, letting the home deteriorate, or defaulting on your first mortgage – they could foreclose on their lien on your property. This is a lower risk than a mortgage loan, but you still have to comply with the terms of your HEA.

Are home equity agreements typically used for home purchases?

No, HEAs are not normally used to purchase a home. They are designed to support equity-rich homeowners who already have property value built in. However, some companies like Point or Unlock offer variations of HEAs, offering down payment money without debt. But you will share future gains, and if your home value drops, you’re still on the hook to repay the original amount given.

Would having an HEA make it harder to sell your home down the road?

Having a home equity agreement in place shouldn’t prevent you from selling. But it could add another layer to manage at closing. Your net proceeds will be lower because you’ll be required to repay the investor the lump sum you originally received, plus their share of your appreciation upon closing. If your proceeds are short, you could negotiate a buyout, refinance into the new buyer’s loan (if allowed), or cover it from other assets. In a worst-case scenario, the sale might not close if you cannot settle.