In the past five years, homeowner equity has spiked 63%. But as an increasingly large proportion of homeowners are house-rich, cash poor, fewer homeowners can access that equity. A home equity agreement (HEA), also known as a shared equity agreement, is a way for homeowners to access the equity in their homes without resorting to traditional methods such as loans or lines of credit.
Here, we’ll dive into what home equity agreements are, how they work, and what risks you should consider if you’re looking into a home equity agreement. Let’s get right to it!
How a home equity agreement works
A less-common name for home equity agreements is a ‘home IPO.’ This refers to an initial public offering (IPO), which is when a company’s stock is made available to public markets. A ‘home IPO’ is a nifty way to think about how a home equity agreement works.
With a home equity agreement, you essentially sell a share of your home to an investor, just like a business might sell stocks or a part of its ownership. In return for selling a part of your home, you receive funds, like a business funded by investment.
Ending a home equity agreement also parallels the business world. If a business took investments and sold parts of its ownership, it would have to pay those investors back to regain total ownership. And if the company had been doing well, the investor’s share of ownership could increase in value. With a home equity agreement, you’ll have to pay back the investment, and if your home appreciated since you received the funds, it will cost you more to buy back the investor’s share of ownership.
When should you consider a home equity agreement?
Home equity agreements certainly come with their risks, so it’s important to know whether you should even consider one. Generally, HEAs are viable if you’re house-rich and cash-poor, meaning you own a home but lack access to liquidity. Or, if you have some equity in your home but cannot access traditional lending methods due to poor credit history or unstable employment.
Like any financial decision, pursuing a HEA shouldn’t be taken lightly, as it can significantly affect your future. While they may be a viable option, they may not always be the best option. So let’s weigh the pros and cons of home equity agreements:
The key advantages of a home equity agreement
If you’re facing burdensome debt, medical bills, job loss, or any other financial challenge, you might have struggled to find help through traditional banks or lenders. Home equity agreements offer a welcome change from those borrowing options. Some of the key advantages of home equity agreements include:
1. No credit score or income requirements
Compared to traditional financing options like a HELOC or home equity loan, eligibility for home equity agreement isn’t based on your credit score or income. Home equity agreements open opportunities for homeowners who are facing financial challenges and wouldn’t be eligible for financing from traditional banking institutions and lenders.
For example, a homeowner who lost their job wouldn’t qualify for a home equity loan because they don’t have an income. With a home equity agreement, they may be able to access some of their home equity despite that.
2. No interest or debt
According to Experian, one of the U.S.’ main credit reference agencies, the average consumer held over $23,000 in debt in 2023. And that’s not even including mortgages. So, it’s no surprise that homeowners across the country are hesitant to add even more debt to that balance.
Home equity agreements help homeowners in this situation because they aren’t a form of debt. Plus, because there aren’t any interest payments, homeowners can use their home equity to address their most pressing financial needs without the constant burden of compounding interest.
3. No monthly payments
For homeowners who are at risk of falling behind on their mortgage or other loan payments, home equity agreements offer a respite. With no monthly payments, home equity agreements allow homeowners to focus their resources on paying off debts, eliminating medical bills, or making improvements to their home.
So, what are the risks of home equity agreements?
While home equity agreements have distinct advantages when compared to traditional lending options, they’re not risk free. Let’s take a look at some of the risks that have to be taken into consideration when looking into a home equity agreement.
1. Home equity agreements can enable unimproved financial habits
If you’re using a home equity agreement to pay off debt, it’s essential to consider the habits or circumstances that put you in debt originally. For example, if you’re using the funds from your home equity agreement to pay off credit card debt, you should ensure you’ve changed your spending habits.
If you haven’t changed the way you manage your finances, the funds from a home equity agreement could be a risky temptation. Misusing those funds could make your situation even worse.
2. Your home’s appreciation is a double-edged sword
It’s not necessarily a risk, but if your home appreciates during the term of your home equity agreement, it can increase the amount you need to pay back.
Think back to the business analogy. If the business — your home — increases in value, it will cost more to purchase the investor’s share. Be sure you account for the potential increase in equity value when planning to pay back the home equity agreement.
3. Unaffordable balloon payments could force you out of your home
Most home equity agreements require a lump sum payment at the end of the contract. For many providers, this is 10 years. And although you won’t face monthly payments during that time, you’ll still need to diligently prepare for a single payment that could be over $60,000.
Plus, if your home appreciates during that time, the payment could be so great it leaves you with no choice but to sell your home. However, many home equity agreement users plan to sell their home in a few years, which removes some of the risk of balloon payments.
Not comfortable with a home equity agreement? Try SKYDAN’s sale-leaseback solution
A home equity agreement is a ray of hope for many homeowners. But the ideal scenario it offers can disguise the risks. If you’re not comfortable with the potential of being burdened by your home’s appreciation or facing an enormous balloon payment, consider SKYDAN’s sale-leaseback program. It offers the same benefits without the risk of long-term costs.
Like a home equity agreement, SKYDAN doesn’t care about your credit score, income, or debt. As long as you have equity in your home, you could qualify for our program. Here’s how it works:
Ready to take the next step toward financial freedom? See if you qualify today!