Home Equity Agreement: What Is It?

Your home’s equity is one of the most powerful financial tools at your disposal. But what if you don’t have good enough credit for a home equity loan or home equity line of credit? In this case, you might still qualify for a home equity agreement.

What if you’re not sure what a home equity agreement is or how to use it? Read on to learn more about these unique financial strategies.

What Are Home Equity Agreements?

Put very simply, a home equity sharing agreement means that an investor takes out a minority ownership stake in your property based on the property value. For example, if you’ve built up to 50% equity in your property, you can find an investor to invest in 20% of that equity. 

Why do companies do this?

In short, it's because they expect your property's equity or value to appreciate and become even more valuable over time. In a home equity agreement, the investor gets to take home the profits from that equity since you'll pay them back for the equity they originally "purchased."

Compared to other options, like a cash-out refinance, a home equity investment enables you to dip into the value of your home for:

• Home improvements and home renovations
• Increase your cash flow and pad your savings
• Pay off credit card debt or debt from other loans to improve your overall financial situation

However, a home equity agreement is highly dependent on the fair market value of your property. It’s a flexible real estate tool, but home appreciation can affect just how much money you may receive from an investor or mortgage lender.

How Does a Home Equity Agreement Work?

A home equity agreement usually works like this:

• You ask a home equity-sharing investment company for a prequalification estimate, which tells you how much cash you might receive in exchange for a portion of the future value of your property.
• The home equity sharing company will determine an approved starting home value through market analysis and internal systems or they will order an appraisal to determine your property’s real market value.
• If you qualify for a home equity agreement, the company will pay you a lump sum for the equity they invest in. The company then technically owns a portion of your home, but the company doesn’t have any occupancy rights.
• Rather than paying interest, you instead agree to give the investment company a percentage of the future equity appreciation in your property. Depending on the investment company and their agreement, you may not be required to make any monthly payments.
• At the end of the home equity sharing agreement term or when you decide to sell your house, you pay the investment company back for the equity they’ve invested in at the current market value. In this way, the company makes a profit. Meanwhile, you get immediate access to cash through your home’s equity.

This is the best way to understand a home equity agreement. It’s a tool for you to get cash for a share of your home equity.

Like other refinancing tools, such as reverse mortgages and similar financial products, you need to understand how this hometap works. If you already have a personal loan or a high-interest mortgage loan for your existing mortgage, home equity products like this may not be ideal for your financial goals.

Alternative Solution: Co-Ownership With Balance

Balance Homes is a co-ownership solution with a mission to help American homeowners stay connected to the homes they love by offering a flexible alternative to traditional financing when life circumstances change. Our model also focuses on long-term financial health and education, helping homeowners understand their options, manage their equity, and build a plan that fits their needs.

Ready to get started? Get your free proposal today.

Sources:

Home Equity: What It Is, How It Works, and How You Can Use It | Investopedia

What Is a Home Equity Sharing Agreement? | NerdWallet

Understanding your home's equity | Freddie Mac

What is a home equity line of credit (HELOC)? | Bank of America