What It Is, Pros And Cons

What is home equity sharing?
When you enter into an agreement with a home equity investment company, you receive a cash amount equal to a percentage of your home’s value. You need to repay that loan, plus a risk adjustment fee that can range from 2% to 20% of your property’s appraised value at the time of repayment. Rather than monthly installments, payment is due in full when you sell your home or at the end of an agreed-upon term. As part of the arrangement, the HEI company places a lien on your house. That means if you fail to meet the terms of your agreement, it can claim your home and force a sale.
How does a home equity sharing agreement work?
To see how much cash you can receive, you’ll need to request a pre-qualification estimate.
The HEI company will direct you to get a home appraisal and use it to determine the risk of investing. You’ll be assessed a risk adjustment rate, which can range from 2% to 30% of your home’s value.
Next, you’ll be paid for the equity the company has bought in your home, minus the risk adjustment rate. You’ll also have to pay an origination fee, generally between 3% to 5%.
Instead of monthly payments, you’ll repay the HEI company in one lump sum at the end of your agreed-upon term, which can be anywhere from 10 to 30 years, or when you sell the house.
In addition to repaying the principal, you will need to pay the amount equal to the risk adjustment rate, based on the home’s value at the end of the term. So if your house appreciates since you signed the agreement, you’ll owe more. if your house depreciates in value, of course, you’ll owe less.
What are the fees associated with a home equity sharing agreement?
Aside from having to pay the company a percentage of your home’s potential appreciation, there are several fees involved in a home equity investment. They include an origination fee, which is usually between 3% to 5% of the cash equity advance, as well as the cost of an appraisal, home inspection, title and escrow services.
To avoid out-of-pocket costs, you can often have these charges deducted from your cash payout.
A sample home equity sharing agreement Say, your house is worth $200,000 and a home equity company pays you $50,000 for a 10% stake in the property. Twenty years later, the term is up and your home is worth $400,000. You’d owe the company $90,000: The original $50,000 plus 10% of the total appreciation.
Home equity sharing vs. home equity loans vs. HELOCs
A home equity sharing agreement is similar to a HELOC and a home equity loan because homeowners are levering equity in their houses to access cash. But the are significant differences, as well.
Home equity loans HELOC Home equity sharing Structure Lump sum loan Revolving line of credit A investment sharing agreement Max loan amount typically up to 85% of the home’s value, including mortgage typically up to 85% of the home’s value, including mortgage Typically between $15,000 and $600,000 Repayment terms After single loan disbursement, monthly payments for 10 to 30 years. After initial draw period, monthly payments for 20 to 30 years Full payment due at end of the term or when house is sold. Origination fee Origination fee of 0.5%–1% and closing fees of 1–5% Origination fee of 0.5%–1% and closing fees of 1–5% Origination fee of 3%—5% Cost of borrowing Maximum APR is 18% Maximum APR is 18% risk adjustment fee is 2%—20% of home’s appraised value at the time of repayment Home equity required 20% 20% 25% Credit and debt-to-income requirements Credit score: 620, DTI: 43% Credit score: 620, DTI: 43% Credit score: 500, no DTI requirement
Home equity sharing companies
Home equity sharing agreements are a relatively new concept, but some providers have already become leaders in the field. Make sure whatever firm you choose has a payback cap, so you’re not paying an exorbitant amount when your bill comes due. HomeTap With HomeTap, homeowners can leverage their home’s value to secure up to 20% of its value, up to $600,000.
HomeTap Learn More Types of loans Home equity investment
Terms 15 to 30 years
Credit needed 500
Minimum home equity required 25%
Minimum income requirement None
HomeTap requires homeowners to settle their investment payment within 10 years, which is shorter than some other companies. To apply, you must have at least 15% equity in your home and live in one of 16 states Hometap offers agreements. Point Available in 22 states, Point will pay homeowners up to $500,000 for a stake in their property. It has an available repayment term of 30 years, longer than many competitors. But the risk adjustment fee — up to 29% — is relatively high, as well.
Point Learn More Types of loans Home equity investment
Terms 30 years
Credit needed 500
Minimum home equity required 25%
Income requirement None
HomePace If you want to avoid upfront costs, HomePace doesn’t charge origination fees when you sign your home equity agreement. Those costs don’t vanish, however — they’re deducted from your cash disbursal. HomePace offers up to $250,000 for a piece of your home equity. Agreements are only available in six states, however, and HomePace has a relatively high 630 credit score requirement.
HomePace Learn More Types of loans Home equity investment
Terms 15 years
Credit needed 630
Minimum home equity required Not disclosed
Minimum income requirement Not disclosed
When does home equity sharing make sense?
Home equity sharing can be appealing to homeowners who can’t get approved for home equity loans or HELOCs because their debt-to-income ratio is too high or their credit score is too low.
Some HEI companies will accept applicants with credit scores as low as 500. Helene Raynaud, senior vice president of housing initiatives at Money Management International, says it’s a viable option for some homeowners — but not everyone.