What are the advantages and disadvantages of home equity sharing, and which companies offer this service?

An alternative to accessing cash through a home equity line of credit (HELOC) or a home equity loan is through home equity sharing, also known as home equity investment (HEI).

In exchange for a portion of their home's value in the future, homeowners receive cash upfront with an HEI.

Understanding home equity sharing, its advantages and disadvantages, and who it may be suitable for is essential.

What is home equity sharing?

Receiving a cash amount equal to a percentage of your home's value is the benefit you get when you enter into an agreement with a home equity investment company.

At the time of repayment, you will need to pay back the loan, along with a risk adjustment fee that can range from 2% to 20% of your property's appraised value.

Instead of paying in monthly installments, the full payment is due either when selling your home or upon completion of an agreed-upon term.

If you fail to meet the terms of your agreement with HEI, the company can place a lien on your house and potentially seize it through a forced sale.

How does a home equity sharing agreement work?

• To determine the amount of cash you can receive, you must request a pre-qualification estimate.
• The HEI company will evaluate your home's value through a home appraisal to determine the risk of investing. You may be charged a risk adjustment rate ranging from 2% to 30% of your home's value.
• You will receive payment for the equity the company has purchased in your home, but this amount will be reduced by the risk adjustment rate. Additionally, you will need to pay an origination fee, typically ranging from 3% to 5%.
• Instead of making monthly payments, you will repay the HEI company in a single lump sum at the end of your agreed-upon term, which can range from 10 to 30 years, or upon selling the house.
• You will need to pay an additional amount equal to the risk adjustment rate, based on the home's value at the end of the term. If your house appreciates, you'll owe more, and if it depreciates, you'll owe less.

What are the fees associated with a home equity sharing agreement?

In addition to the percentage of potential appreciation, a home equity investment entails several fees.

The origination fee, typically between 3% to 5% of the cash equity advance, as well as the cost of an appraisal, home inspection, title, and escrow services, are usually included in a cash payout. To avoid out-of-pocket costs, these charges can often be deducted from your cash payout.

Home equity sharing vs. home equity loans vs. HELOCs

A home equity sharing agreement, like a HELOC and a home equity loan, allows homeowners to borrow money using the equity in their homes as collateral. However, there are notable distinctions between the three.

Home equity sharing companies

Ensure that the firm you select for a home equity sharing agreement has a payback cap to prevent excessive payments when your bill is due. Although home equity sharing agreements are a relatively new concept, some providers have already established themselves as leaders in the field.

HomeTap

Homeowners can secure up to 20% of their home's value, up to $600,000, with HomeTap.

Unlike some other companies, HomeTap mandates that homeowners pay off their investment within a decade.

To be eligible for Hometap's home equity sharing agreements, you must reside in one of the 16 states they offer and possess at least 15% equity in your home.

Point

Homeowners in 22 states can receive up to $500,000 from Point in exchange for a stake in their property. The repayment term is 30 years, longer than many competitors. However, the risk adjustment fee, which can be as high as 29%, is relatively expensive.

HomePace

HomePace doesn't charge origination fees when you sign your home equity agreement, but those costs are deducted from your cash disbursal.

HomePace provides up to $250,000 in home equity loans, but agreements are only available in six states and the company requires a minimum credit score of 630.

When does home equity sharing make sense?

Homeowners who are unable to secure home equity loans or HELOCs due to high debt-to-income ratio or low credit score may find home equity sharing appealing. Some HEI companies accept applicants with credit scores as low as 500.

Helene Raynaud, senior vice president of housing initiatives at Money Management International, states that it's a feasible option for certain homeowners, but not all.

"The product is risky, but some investors may offer up to half a million dollars. It's crucial to ensure that individuals understand the risks and can adhere to their goals with the sudden influx of cash."

Raynaud advised that the proceeds from a home equity investment agreement should be utilized wisely, such as for renovating a home or starting a small business. However, if the funds are being used for frivolous spending, such as a splurge or a trip, or to pay off credit cards, she recommended considering a different financial strategy.

It's recommended to consult with a housing expert before entering into a home equity sharing agreement. The Department of Housing and Urban Development (HUD) offers a directory of approved housing counselors.

Home equity sharing: Pros and cons

Meet our experts

We interviewed Helene Raynaud, senior vice president of housing initiatives at Money Management International, a nonprofit debt counseling agency, for this story. Raynaud has specialized knowledge and authority based on relevant training and/or experience, having previously worked at the Consumer Credit Counseling Service, the National Foundation for Credit Counseling, and Fannie Mae.

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