Homeowners Can Access Their Home’s Value Without Taking on Debt — But Should They?
Written by
Jake Safane
Edited by
Amber Barkley
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
The real estate market presents a conundrum for many homeowners right now. The rise in prices in recent years has increased tappable home equity to record highs. But relatively high interest rates mean that accessing this equity, such as via a home equity loan or home equity line of credit (HELOC), can strain your budget as you make monthly payments.
However, a trending development has been the use of home equity agreements, also called home equity sharing agreements or home equity contracts. These agreements provide a lump sum of cash based on your home equity, without requiring monthly repayments or typical interest charges. Instead, the repayment is based on your home’s future value.
While that could be appealing and work well for some homeowners, the devil is in the details. In many cases, home equity agreements end up costing more than traditional home-secured financing, according to the Consumer Financial Protection Bureau (CFPB).
Before you make a decision, it’s important to understand the pros and cons of various home equity options.
How Do Home Equity Agreements Work?
The specifics of home equity agreements vary by company, but in many cases, homeowners get cash upfront based on a percentage of their home’s value, such as 10% or 20%.
Repayment is then required after the end of a contract period, such as 10 to 30 years, or if a triggering event like a home sale occurs before then. The repayment amount depends on how the contract is structured but is generally based on how much equity the homeowner accessed, the home value at the time of the repayment, and a multiplier on the initial cash outlay.
For example, a home equity contract provider might require a 2X multiplier, meaning that if you took 20% of your home’s value initially, they would require repayment of 40% of your home’s end value.
The value at the time of repayment is likely different from what it was when you started the contract, so not only might you pay a higher percentage, but if your home increased in value, you would also pay more. The higher percentage or certain contract terms might also limit the provider’s downside if your home loses value.
Be Mindful of the Pros and Cons
While home equity agreements can be expensive to repay, these contracts can be beneficial to some.
Potential Benefits
“A homeowner may have an immediate need for capital, for example, for renovation or investment, and may find a potential means to minimize the impact of fixed repayments,” said Andreis Bergeron, VP of sales at Awning, a real estate investing technology company.
In other words, you might not be in a position to make monthly payments, so accessing your home equity in this way could provide important flexibility. For example, maybe you’re struggling with other debt payments, and taking out a home equity loan wouldn’t give you the room you need in your monthly budget to get back on track.
Understand the Risks
Still, homeowners should be well aware of the risks associated with these products, rather than getting caught up in the excitement of a new offering.
“An unusual but important disadvantage is that they would have to give up part of the future profits that could become substantial,” Bergeron said.
He also pointed out that, depending on the contract, the amount you have to pay back could change if your home use changes, or you might be restricted, such as in terms of remodeling.
And when the contract term is up, you might not have the funds to make the repayment. So, you might end up selling your home earlier than you planned or making alternative arrangements, like doing a cash-out refinance, to pay back the lump sum.
Other downsides include costs such as origination fees, which can add to the already high long-term expense of these products. Moreover, the complexity of these contracts can ultimately confuse homeowners and leave them in an unintended position — the CFPB highlighted how some consumers feel frustrated or misled.
Takeaway
Before hopping on this bandwagon, homeowners should carefully consider all the possible risks vs. benefits. It may be the case that using these contracts works out best for some, but don’t assume you’ll save money compared other ways to access your home equity.
“Assessing whether a home equity agreement is appropriate requires a comprehensive understanding of one’s financial path, appetites for risk and long-term investment goals,” said Bergeron. “Comparing the terms of these agreements to more traditional equity loans or lines of credit is key — and being aware of the potential for unexpected market changes, as well as for non-standard contract clauses that may not suit an individual’s remodeling or relocation plans.”
More From GOBankingRates
