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Jess Ullrich
Linda Bell is a senior writer on Bankrate's Home Lending team, producing content around HELOCs, financing home renovations, home equity loans and more.
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Troy Segal is a senior editor for Bankrate. She edits stories about mortgages and home equity, along with the finer financial points of owning and maintaining a home.
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Most homeowners wouldn’t mind being able to tap their homes for cash from time to time. Home equity loans and lines of credit are common ways to do so. But if those don’t work for you, another option exists: a home equity sharing agreement.
Also known as a shared equity agreement or a shared equity finance agreement, it’s an arrangement between multiple parties, typically a homeowner and a professional investor (in fact, “home equity investing” is yet another term for the process). A company provides you with a lump-sum loan in exchange for partial ownership of your home, and/or a share of its future appreciation. You don’t make monthly repayments of principal or interest; instead, you settle up when you sell the home or at the end of a multi-year agreement period.
Home equity sharing agreements are generally best for people whose poor credit or temporary financial difficulties could make qualifying for a traditional loan or line of credit difficult. Here’s how these agreements work, the benefits and drawbacks, and who they are right for.
If you’re considering a shared agreement, here’s how the process generally goes. In some ways, it’s not that different from applying for a home equity loan or any sort of home-secured financing.
If the homeowner dies, what happens to the contract? Generally, the heir(s) have the option of continuing the home equity sharing agreement or concluding it — either by selling the property or paying back the company’s share in some other way. In the case of divorce, the options for shared equity agreements and the marital home are typically the same. The two parties have to agree if they will sell the house and split the proceeds — in community property states, it must be split evenly — or to maintain co-ownership, or if one spouse will buy out the other. Basically, the agreement “follows the home”: If it is sold, the investment firm gets paid out of the proceeds. If one spouse retains it, they retain liability for the agreement. But the particular terms can vary by investment company — it’s the one deciding whether the agreement is assumable or must be concluded. So do pay attention to the fine print in the contract, which should carry provisions in case of death or divorce.
There are two common types of shared equity agreements. In both cases, you receive a lump sum from your investor/lender. It’s how they get compensated in return that differs.
With this model, you’re obligated to repay the home equity sharing company your initial loan amount, plus a predetermined percentage of your home’s future appreciation, if any.
With this model, instead of repaying the original lump sum you receive, you just pay a percentage of the home’s value at sale time. So if your home declines in value, the percentage you’ll pay to the investor will decrease; you could even pay back less than your original loan.
Of course, the investors are well-aware of the risk of pegging returns to future appreciation. Often, they lowball or “risk-adjust” your home’s appraisal value to compensate, so it’ll always seem like the home appreciated to some degree.
While they sound almost identical, home equity sharing agreements are not the same as shared equity or shared appreciation mortgages. Both do involve two parties — one a homeowner (or prospective homeowner), the other an investor — jointly having an ownership stake in a property. The latter involves an arrangement to buy a home (a lender may offer you a lower rate in exchange for a share of your home’s potential appreciation); the former is an arrangement to sell a portion of the home’s equity in exchange for cash upfront. Some professionals use “shared equity agreement” as a generic term to describe both types of transactions, specifying the loan-to-a-current homeowner type as a shared equity finance agreement.
Home equity sharing companies are becoming more popular and widespread. Among the more well-established are Hometap, Unison, Unlock and Point.
As a home equity sharing agreement could be a costly endeavor in the future, it’s wise to compare different companies’ reputations, repayment terms, and the percentages of your home’s appreciation or value they’ll receive. Also look at their up-front fees (many charge you origination fees and home appraisal fees) and risk-adjusted amounts of appraised value.
Whether it’s consolidating debt, renovating your home or taking a vacation, homeowners can typically use the funds from home equity sharing agreements for anything. The money’s yours, after all.
However, some exceptions may exist, depending on the investment company. Unlock, for example, sets some conditions for homeowners with a credit score in the 500 – 549 range and a debt-to-income ratio greater than 45 percent. Unlock requires those individuals to use the funds to pay off debt.
“We want to put that customer in the best position to qualify for their next mainstream financial product,” says Michael Micheletti, chief marketing officer at Unlock Technologies. “Maybe rates come down in a year from now and you can do a cash-out refi. Maybe rates come down and you want to just refi generally speaking…We believe we are setting customers up for success by mandating those payoffs.”
Home equity sharing agreements include transaction fees, which cover the costs associated with setting up and managing the agreement. They’re generally around 3 to 5 percent or so of the total funding amount: For example, Hometap charges a 3.5 percent fee, while Unlock charges 4.9 percent.
Also, homeowners should expect to pay third-party fees, like the home appraisal and various other administrative expenses (not unlike closing costs). Those expenses are typically deducted from the proceeds from the distributed funds.
After the appraisal, some lenders may also apply a risk adjustment to the home’s value. This figure is what the investor uses to calculate the sum they’ll give you; they also use this figure to calculate your home’s appreciation at payout time. Unison’s adjustment is 5 percent of the home’s starting value, for example. If the home appraises for $300,000, the risk-adjusted value would be $285,000, a $15,000 difference.
This risk adjustment means under the agreement, homeowners may get less value out of their home’s equity than they’d thought, and have to pay out more to the investment company at the agreement’s end.
Shared equity agreements aren’t right for everyone. But they can make sense in certain cases, especially for those who are house-poor (possessing a valuable property, but lacking liquid assets). Or, for homeowners who have a decent amount of home equity, but whose credit history, existing debt load or lack of income are barriers to qualifying for traditional home-secured loans, an equity sharing agreement may be worth considering. It may also be an option if you have an unsteady income or a fixed income and can’t afford additional monthly obligations.
However, individuals with good or excellent credit, manageable debt and a stable income may find that a home equity loan, HELOC or even a personal loan is likely a better option.
Always weigh the pros and cons before determining if a home equity sharing agreement is right for your situation. In some cases, these agreements have larger costs than benefits, so it may be a wiser decision to focus on improving your financial profile and seeking out more traditional ways of tapping your home equity.
