Home equity agreements (HEAs) are becoming an increasingly popular way for homeowners to tap into the value of their homes without taking on additional debt. Whether you own a house in San Jose or a home in Dallas, an HEA can provide a much-needed financial boost, especially for those who may not qualify for traditional home loans or prefer to avoid new monthly payments. But what exactly are HEAs, how do they work, and who should consider them? In this Redfin guide, we’ll break down everything you need to know about home equity agreements.
Home equity agreement key takeaways:
- A HEA lets you access cash from your home’s equity without debt or monthly payments, but you give up a share of future value.
- HEAs have upfront costs (3%–5% of the payout) and can be costly if your home appreciates.
- Best for homeowners needing cash without a loan; HELOCs or home equity loans offer more ownership and flexibility.
What is a home equity agreement (HEA)?
A home equity agreement is a financial arrangement where a homeowner sells a portion of their home’s future value in exchange for upfront cash. In other words, rather than borrowing money through a home equity loan or line of credit, you enter into a contract with a third party (often a private investor or a company) that gives you access to a lump sum of cash in exchange for a percentage of the future appreciation of your home.
The key distinction here is that, unlike a loan, there is no monthly payment required. Instead, the investor is repaid either when the homeowner sells the property or when the agreement reaches its agreed-upon term—usually 10 to 30 years.
How do home equity agreements work?
HEAs generally operate on a straightforward premise: you agree to sell a percentage of your home’s future value to an investor in exchange for an upfront lump sum. Here’s how the process typically works:
- You receive an upfront payment: A company or investor gives you a percentage of your home’s current value in cash. The amount you receive is based on your home’s market value, your equity, and the agreement’s terms.
- You don’t make monthly payments: Unlike a home equity loan or HELOC, a HEA doesn’t require monthly repayments. Instead, the investor waits until the agreement ends—usually after 10 to 30 years—or when you sell the home.
- Repayment happens when you sell or refinance: When the agreement term ends, or if you decide to sell or refinance your home before then, the investor collects their agreed-upon share of your home’s value. If your home appreciates, they get a portion of the increased value. If it depreciates, they share in the loss. If you don’t sell, you may need to refinance, buy out the investor’s share, or extend the agreement.
- Fees and costs apply: While HEAs don’t come with interest charges, there are still fees involved. These may include origination fees, closing costs, and early termination fees if you decide to buy out the investor’s share before selling the home. The fees and additional costs for a home equity agreement typically range between 3% and 5% of the cash you receive.
Essentially, a home equity agreement allows you to access your home’s equity without taking on additional debt, but it also means sharing a portion of your home’s future value with an investor.
HEA vs. HELOC: Key differences
A Home Equity Agreement (HEA) and a Home Equity Line of Credit (HELOC) both let homeowners tap into their home’s value, but they work very differently.
- HEA: You receive a lump sum of cash in exchange for a share of your home’s future value. No monthly payments or interest, but you give up equity. Repayment happens when you sell or at the end of the agreement term.
- HELOC: A revolving line of credit secured by your home. You borrow as needed, repay with interest, and can reuse the funds. Monthly payments are required, and failing to pay could lead to foreclosure. Compare current HELOC rates here.
Which is better? If you want debt-free cash with no monthly payments, an HEA may be a good fit. If you prefer flexible borrowing and keeping full homeownership, a HELOC is likely the better choice.
What are the pros and cons of home equity agreements?
| Pros of HEAs | Cons of HEAs |
| No monthly payments | Giving up a share of future home value |
| Debt-free option | Repayment amount could be high |
| Flexible terms | Not ideal for long-term financial needs |
| No impact on credit score | Investor restrictions may apply |
| No risk of foreclosure | Less control over equity decisions |
Pros of HEAs
No monthly payments: For homeowners who may be struggling with cash flow or simply don’t want the added burden of monthly payments, HEAs provide a way to access home equity without taking on debt.
Debt-free option: Unlike home equity loans or lines of credit, there is no new loan involved. There’s no interest rate, and you don’t need to worry about defaulting on the agreement.
Flexible terms: HEAs tend to offer more flexibility than traditional loans. For example, the repayment timeline can range from 10 to 30 years, depending on the agreement.
No impact on credit score: Since you’re not borrowing money, HEAs don’t affect your credit score. There’s no credit check required to enter into a home equity agreement, which can be helpful for those with less-than-perfect credit.
No risk of foreclosure: Because HEAs are not loans, homeowners don’t risk foreclosure if they fail to make a payment. However, the investor will claim their portion of the property’s value when the agreement ends.
Cons of HEAs
Giving up a share of future home value: The biggest downside of a HEA is that you’re giving up a percentage of your home’s future value. If your home appreciates significantly, you could end up paying much more than you initially received in cash. This is a gamble, but one that can pay off for the investor if the housing market is favorable.
Repayment amount could be high: Depending on the terms of the agreement, the repayment amount could be substantial. If the property increases in value significantly over the term of the agreement, the investor’s share could be much larger than the cash you received upfront.
Not a long-term solution: HEAs are typically best suited for people who need a short-term financial boost and are confident they won’t need to access additional funds later. Because they lock you into a long-term arrangement, a HEA might not be the best option for people who anticipate needing more capital down the road.
Investor influence: Some home equity agreement programs require you to work with specific companies, which can place restrictions on how you can sell or refinance the property during the agreement. Some companies may also require approval before you make certain decisions regarding your home.
Lack of control: Unlike with a home equity loan, where you can choose how to use the funds, an HEA requires you to accept the lump sum amount offered by the investor, and that’s it. You don’t get to decide how much equity you want to sell or negotiate the percentage the investor gets.
Who should consider a home equity agreement?
HEAs are not suitable for everyone, but they can be a good option for some homeowners. Here are a few scenarios where HEAs might make sense:
- Homeowners with limited income or poor credit who may not qualify for a home equity loan or line of credit.
- Homeowners who need a cash infusion for home repairs, medical bills, or other financial needs but prefer not to take on new debt or monthly payments.
- Homeowners who are planning to sell soon and are confident that their home will appreciate in value within the near future. This could be an effective way to tap into the value of your home without the burden of debt.
How to get a home equity agreement
Getting a home equity agreement involves a few key steps, similar to a home loan but with different approval criteria. Here’s how the process works:
- Check eligibility – Most HEA providers require at least 25% to 30% equity in your home, a minimum credit score (often around 620+), and that the home is your primary residence or an investment property.
- Compare providers – Different companies offer varying terms, fees, and payout amounts. Shop around to find the best deal for your situation.
- Get a home appraisal – The provider will assess your home’s market value to determine how much cash you can receive. This often involves a professional appraisal, which you may need to pay for upfront.
- Review the terms – Carefully read the agreement, including how much equity you’re giving up, fees, and repayment terms. Some agreements have early buyout restrictions or additional costs.
- Receive your payout – Once approved, you’ll get a lump-sum payment, typically 10% to 30% of your home’s value, minus any fees.
- Manage your agreement – You won’t make monthly payments, but you’ll need to maintain the home and stay within the agreement’s terms. The HEA is repaid when you sell, refinance, or at the end of the term.
Home Equity Agreement FAQ’s
1. Can I use a home equity agreement on an investment property or a second home?
It depends on the provider. Some HEA companies allow agreements on second homes and investment properties, while others require the home to be your primary residence. If you’re looking to access equity from a rental property or vacation home, check with individual providers to see if they offer this option.
2. How does a home equity agreement impact estate planning and inheritance?
If the homeowner passes away before the HEA term ends, the agreement typically transfers to their heirs. The heirs may need to sell the home, refinance, or buy out the investor’s share to settle the agreement. Some HEA providers may have specific clauses related to inheritance, so reviewing the contract is essential.
3. What happens if I want to buy out the investor’s share before selling?
Many HEAs allow homeowners to buy out the investor’s share before selling, but this often comes with fees or a required holding period before a buyout is permitted. The buyout price is typically based on the home’s appraised value at the time of the buyout, meaning you could owe more than you originally received if the home has appreciated.
4. Can I combine an HEA with a mortgage, HELOC, or other home equity products?
Yes, but there are restrictions. Some HEA providers allow homeowners to have a mortgage or HELOC alongside a HEA, while others prohibit additional liens or refinancing without approval. If you already have a mortgage, the HEA provider will often require you to have at least 25% to 30% equity in the home.
5. What maintenance or home condition requirements come with an HEA?
Most HEA agreements require homeowners to maintain the property to protect its value. This means you must keep up with repairs, insurance, and property taxes. Some agreements include clauses that allow the investor to inspect the home periodically or place restrictions on significant renovations.
6. How do HEA providers determine my home’s future value share?
HEA providers base their share on your home’s current appraised value and projected appreciation. The investor typically takes a larger percentage of future appreciation than the percentage of cash they provide upfront. For example, if they give you 10% of your home’s value in cash, they might claim 20% to 30% of future appreciation.
7. Can I negotiate the terms of a home equity agreement?
Some aspects of an HEA may be negotiable, such as the fees, percentage of appreciation given up, and early buyout options. However, many providers have standardized contracts, making negotiations difficult. It’s a good idea to compare multiple providers to find the most favorable terms.
8. What are the biggest risks of an HEA in a declining housing market?
If your home loses value, the investor may share in the loss—but this depends on the agreement. Some HEAs guarantee a minimum repayment amount, meaning you could still owe more than your home is worth. A market downturn could also make refinancing or selling the home more challenging, leaving you with limited options when the agreement term ends.
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