What Is a Home Equity Agreement?

Home equity agreement. Home equity investment. What’s the difference between the two? Spoiler alert: nothing. If you’ve noticed the term “home equity agreement” (HEA) popping up as you’ve been looking for ways to access your home equity and are wondering how it compares to a home equity investment (HEI) — what Hometap offers — you’re not alone. We’re here to clear up any confusion.

When you think about it, your home is more than a comfortable space for your family. It's also a potential financial resource. Enter home equity agreements (HEAs) or, as we like to call them at Hometap, home equity investments. No matter what you call it, it’s a unique, investment-focused approach to leveraging your home's equity without the need for traditional loans or monthly payments.

Just like an investment, an HEA is a strategic way to grow your home’s value and your wealth in the long term. Let's explore what a home equity agreement is, how it works, and why it might be a game-changer for you.

What Is a Home Equity Agreement?

A home equity agreement (HEA), or what we at Hometap prefer to call a home equity investment (HEI), is an innovative financial product that offers homeowners a way to access the value they’ve built in their home without taking on a monthly payment. Instead of a traditional loan, you receive a one-time lump sum from an investment company in exchange for a share of your home's future value.

Unlike home equity loans or lines of credit, there are no monthly payments attached to the investment. This can be particularly attractive for those looking to unlock the value of their home while avoiding the monthly financial burden of a repayment.

Home Equity Agreements vs. Home Equity Investments

While home equity agreements and home equity investments might be interchangeable in terms of technical aspects, at Hometap, we strongly believe that “investment” more accurately describes what we do. We see you as the CEO of your household and your family’s financial well-being, just like the leader of a company. And you deserve someone to invest in your home’s long-term growth and value. We focus on doing just that, from the dedicated Investment Manager that walks each homeowner through the application and funding process to our Home Equity Dashboard, which provides tools and resources throughout the entire homeownership journey. So while we understand the use of “agreement,” we believe it's a lot more than that. It’s an investment in your home and in your financial goals.

Home Equity Agreements vs. HELOCs

How does a home equity agreement stack up against a home equity line of credit (HELOC)? Let's take a look at their key differences.

• Structure: A HELOC is essentially a line of credit that lets you pull money from it as needed, whereas a home equity agreement is an investment in your home’s future value.
• Payments: With a HELOC, you're responsible for repaying the money you take out with interest, and rates can vary from month to month. Home equity agreements don’t require any monthly payments, but you’ll owe a lump sum at the end of the term or whenever you decide to settle the agreement.
• Flexibility: Home equity agreements might be a more appealing option for homeowners who want to maintain their cash flow while putting their funds to use. On the other hand, for homeowners that want to pay down what’s owed over time, a HELOC may be the better fit, since home equity agreements don’t typically support payments over time.

How Does a Home Equity Agreement Work?

Just like home equity investments, home equity agreements are fairly straightforward, once you break them down to the basics. Here's a step-by-step look at how they generally work:

• 1. The investment company will order an appraisal to assess your home's current value.
• 2. Based on this assessment, they offer you up to a certain percentage of your home's value, that you can receive in cash. This varies by investor, but is typically around 25%.
• 3. In exchange, you agree to share a portion of your home's future value. This means that at the end of the agreement term, the investment company receives a share of the value at that time. Because this is an investment in your home instead of a traditional loan, there are no monthly payments to worry about.
• 5. Once you’re ready, you can choose to end the agreement by buying out the investment with savings or a refinance, or by selling your home.

Pros and Cons of Home Equity Agreements

Like any financing option, home equity investments have advantages and drawbacks. It’s important to understand both to determine if they could be a good fit for you.

Benefits of Home Equity Agreements

• No monthly payments: Unlike home equity loans or HELOCs, there are no monthly payments attached to a home equity agreement, as the investor receives a portion of the home’s future value.
• Easy access to funding: For some homeowners, tapping into their equity can be an ideal way to make the most of their home’s value without impacting their current debt-to-income ratio, and there’s no income or W-2 requirements, making it an appealing option for those who have unique employment situations.
• Flexibility of use: Whether you're paying off debt, funding a child's education, covering home improvements, or investing in a dream business, it’s up to you how you use the funds from your investment.

Cons of Home Equity Agreements

• Cost of settlement: At the time of your investment, you’re exchanging a portion of your home’s future value to the investor for cash, which could be costly if property values significantly rise, and it’s important to select an investor who is transparent and upfront about cost at the outset of your agreement. Hometap Investments feature a cap that is an annualized rate of return and protects your interest in your property in cases of extreme appreciation.
• Not ideal if you don’t plan to sell: While you can also settle your agreement or investment through a cash-out refinance, buyout with savings, or a loan, this option can be most well-suited for homeowners who have plans to sell their home by the end of the agreement term.

Frequently-asked Questions About Home Equity Agreements

Is a home equity agreement a good idea?

A home equity agreement can be a good way for homeowners looking to tap into their home equity without the monthly payments that come with traditional loans or HELOCs.

How much does a home equity agreement cost?

Typically, there are no out-of-pocket costs for a home equity agreement, since the fees are deducted from the investment amount. However, the homeowner will owe a predetermined percentage of their home’s future to the investment company at the end of the term or whenever they settle the agreement.

Who is the best home equity agreement provider?

Choosing the best home equity agreement company all depends on your own personal situation and goals, as they can vary in terms of terms and pricing structure, so it’s worth your time to research your options. Read reviews from verified platforms like Trustpilot, and ensure you’re crystal-clear about how their pricing and terms work.

How does an equity agreement work?

It works through an exchange between homeowner and investor, where a lump sum of cash is provided to the homeowner in exchange for a future percentage of the home’s value, which provides funds without monthly payments.

Can you pay off a home equity agreement?

Yes, home equity agreements can be paid off (or “settled”) any time within the given term by either buying out the investment with savings, refinancing, or selling the home, giving flexibility to homeowners.

Home equity agreements provide an innovative way to access your home's value without the stress of traditional loans. At Hometap, we see them as strategic investments enabling homeowners to fund dreams and priorities. While they aren't for everyone, for the right individual, these agreements can be a great way to put your equity to work for you to reach your goals.