The real estate market presents a conundrum for many homeowners right now. The rise in prices in recent years has increased tappable home equity to record highs. But relatively high interest rates mean that accessing this equity, such as via a home equity loan or home equity line of credit (HELOC), can strain your budget as you make monthly payments.
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However, a trending development has been the use of home equity agreements, also called home equity sharing agreements or home equity contracts. These agreements provide a lump sum of cash based on your home equity, without requiring monthly repayments or typical interest charges. Instead, the repayment is based on your home’s future value.
While that could be appealing and work well for some homeowners, the devil is in the details. In many cases, home equity agreements end up costing more than traditional home-secured financing, according to the Consumer Financial Protection Bureau (CFPB).
Before you make a decision, it’s important to understand the pros and cons of various home equity options.
The specifics of home equity agreements vary by company, but in many cases, homeowners get cash upfront based on a percentage of their home’s value, such as 10% or 20%.
Repayment is then required after the end of a contract period, such as 10 to 30 years, or if a triggering event like a home sale occurs before then. The repayment amount depends on how the contract is structured but is generally based on how much equity the homeowner accessed, the home value at the time of the repayment, and a multiplier on the initial cash outlay.
For example, a home equity contract provider might require a 2X multiplier, meaning that if you took 20% of your home’s value initially, they would require repayment of 40% of your home’s end value.
The value at the time of repayment is likely different from what it was when you started the contract, so not only might you pay a higher percentage, but if your home increased in value, you would also pay more. The higher percentage or certain contract terms might also limit the provider’s downside if your home loses value.
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While home equity agreements can be expensive to repay, these contracts can be beneficial to some.
“A homeowner may have an immediate need for capital, for example, for renovation or investment, and may find a potential means to minimize the impact of fixed repayments,” said Andreis Bergeron, VP of sales at Awning, a real estate investing technology company.
