Tapping home equity can be a smart way to borrow or a costly mistake, depending on the path you choose.
The traditional options are a home equity line of credit (HELOC) and a home equity loan. A newer alternative, the home equity agreement (HEA), also called a home equity investment, lets you access cash without taking on monthly payments.
In this guide, I’ll briefly explain how each option works, then focus on the bigger questions:
- What are the real trade-offs?
- Who is each option best for?
- And how do you choose the one that fits your situation?
If you’d rather watch a breakdown of these options, here’s my video walking through the key differences between HELOCs, home equity loans, and home equity agreements:
What Is a Home Equity Agreement, HELOC, and Home Equity Loan?
If you’re a homeowner with a lot of equity, you have three primary ways to tap into that value: a HELOC, a home equity loan, or a home equity agreement. Each has very different use cases and eligibility requirements.
- A home equity agreement (HEA). A newer option where you receive a lump sum now in exchange for giving up a share of your home’s future value. But it’s not a 1-to-1 trade — the share you owe later is typically larger than the percentage you received upfront, and the cost grows as your home appreciates. These agreements are often marketed to homeowners who are “equity rich but cash poor,” especially those with poor credit, low income, or limited access to traditional financing. Some providers work with credit scores as low as 500.
- HELOC. A home equity line of credit works like a credit card backed by your house. You’re approved for a set limit and can borrow as needed during the draw period, which typically lasts 5 to 10 years. During this time, you usually make interest-only payments on whatever amount you’ve used. After the draw period ends, you enter the repayment period, where you can no longer borrow and must start paying back both principal and interest. This structure makes a HELOC ideal for uses with staggered costs, like renovations. It’s best for homeowners with strong credit and steady income. While some lenders may approve applicants with scores as low as 620, most require at least a 680 — and the most competitive rates typically go to those with scores above 700.
- A home equity loan. Provides a lump sum with fixed payments over a set term, usually five to 30 years. It’s ideal when you know exactly how much you need upfront. Like a HELOC, it requires strong credit and income to qualify, and interest rates are generally fixed. This is often used for debt consolidation or one-time major expenses.
If you’re new to home equity agreements and want more background, start with my step-by-step guide, How a Home Equity Agreement Works, then read the follow-up breakdown, Key Advantages and Drawbacks of Equity Sharing.
Home Equity Options: Side-by-Side Comparison
| Feature | Home Equity Agreement (HEA) | HELOC | Home Equity Loan |
| Credit Score | 500+ (varies by provider) | Typically 680+ (some go as low as 620) | Typically 680+ (some go as low as 620) |
| Income Requirement | Often flexible or not required | Steady income required | Steady income required |
| Monthly Payments | None | Interest-only for 5–10 years, then higher monthly payments with principal and interest | Fixed monthly payments |
| Cash Access | Lump sum upfront | Draw as needed | Lump sum upfront |
| Repayment Timing | At sale, refinance, or end of term (typically 10-30 years) | Monthly interest-only for 5–10 years, then 10–20 years of full repayment; entire balance due if you sell or refinance | Fixed schedule (e.g., 5–30 years) |
| Rate Type | Not a loan — cost based on future home value | Variable interest rate | Fixed interest rate |
| Best For | Homeowners with lots of equity but limited income or poor credit | Strong-credit borrowers with flexible needs | One-time, large expenses with budget certainty |
6 Key Factors to Consider Before Choosing
Now that you know how each option works, it’s time to look at how they impact your real-life finances. Here are six important factors to help you weigh the pros and cons:
- Eligibility. What credit score, income, and home equity you need to qualify and how that affects your options.
- Monthly Budget Impact. How each option changes your monthly payments now and in the future and whether it fits your budget.
- Total Cost vs. Benefit. How much the money will cost you over time compared to what you’ll gain or save by using it.
- Repayment and Flexibility. When the money needs to be paid back and what happens if you sell, refinance, or need to exit early.
- Risk and Control. How much risk you’re taking on, including rising interest rates, losing home equity, or limits on future borrowing.
- Taxes and Inheritance. Whether interest is tax-deductible, and how each option could affect your heirs if you pass away or transfer the property.
#1. Who Qualifies for a HELOC, Home Equity Loan, or Home Equity Agreement?
While each product has its own criteria, factors like your credit, income, available equity, and overall debt position all influence whether you qualify and what terms you’ll receive.
With a HELOC or home equity loan, your credit, income, and equity shape the interest rate you’re offered.
With a home equity agreement, those same factors help determine how much of your future appreciation the investor will claim. For example, if you have a weaker credit history, you might go from giving up 17.5% of your home’s future value to 20%. Depending on the provider, your financial profile may also affect other contract terms that influence how much you ultimately repay.
Home Equity Agreement (HEA) Eligibility.
Before approving you, most HEA providers look at how much of your home’s value is still untapped after all existing loans, including the new agreement. In general, you’ll need about 20% to 25% of your home’s value available so your total debt doesn’t exceed 75% to 80% of the home’s worth after funding. Some companies accept credit scores as low as the mid-500s, and many do not require steady income.
Your debt position also matters. If this agreement would become a third lien on the home, it raises the lender’s risk and can lead to less favorable terms.
If you’re 62 or older, it’s worth comparing this option to a reverse mortgage. You can see how the two stack up in our guide to home equity agreements vs. reverse mortgages.
The catch is cost. If you have less equity, weaker credit, or higher monthly debt, you’ll likely have to give up a bigger share of your home’s future value.
Tip: If you’ve ever played around with the calculators on HEA provider websites, you might have noticed that the terms often seem comparable to today’s high interest rates. But in my experience, those estimates tend to reflect an above average financial profile. For homeowners with less-than-ideal credit, income, or debt levels, the appreciation share can be much higher.
HELOC Eligibility
HELOCs are priced much like second mortgages, so lenders focus on credit, income, and remaining equity.
You typically need a credit score of at least 680, though some lenders may go as low as 620, a debt-to-income ratio below 43%, and steady earnings that cover the interest-only payment.
Most banks cap the combined loan-to-value between 80% and 85%.
Home Equity Loan Eligibility
Home equity loans mirror HELOCs on the approval requirements—lenders typically look for credit scores of 660 plus, debt-to-income ratios below about 43%, and combined loan-to-value ratios that stay under 80%.
The difference shows up in cost and process.
Because the entire lump sum funds on day one, banks often insist on a full appraisal and charge refinance-style closing fees. Expect two to four weeks from application to funding and be ready to pay several hundred (sometimes a few thousand) dollars at the closing table.
Bottom line. When your credit is weak or your income hard to document, a home equity agreement may be the only door that opens, but you will pay for the access when you share future gains at sale. If you have good credit, a reasonable debt-to-income ratio and plenty of equity, you can usually borrow far more cheaply and predictably with a standard HELOC or fixed home equity loan.
#2. How Each Option Affects Your Monthly Budget
Before you choose any product, you’ll want to map out your household budget line by line—first as it looks today, then as it would look after closing.
To help you calculate your before-and-after monthly expenses, check out my recommended budget templates or explore these top-rated budgeting apps.
Your goal is simple: make sure the new obligation, whether it hits every month or years down the road, won’t squeeze out other financial goals, such as retirement.
Here’s how each option can impact your monthly math.
- Home Equity Agreement (HEA) – No monthly bill can feel painless on day one, but remember you’re trading away a slice of future appreciation — a kind of “shadow interest” that compounds as your home’s value rises. The longer you keep the agreement, and the faster prices climb, the higher that eventual cost can be. An HEA may be useful when you need short-term cash flow — such as wiping out high-interest credit cards or funding essential repairs before a sale — but it often carries the highest long-term price tag. (Or at least the potential to, depending on how much your home appreciates.) See our reviews of Point, Unlock, and Hometap for examples and cost breakdowns.
- HELOC – You only pay interest on what you borrow during the draw period, usually the first 5 to 10 years. This flexibility makes it a good fit for things like renovations or short-term expenses. But the rate isn’t fixed, so it can rise. For example, if your rate jumps from 10% to 13% on a $20,000 balance, you’d owe $600 more per year in interest — and that doesn’t even reduce your debt. After the draw period ends, you must start repaying both principal and interest, which can significantly increase your monthly payment. Be sure to factor in both phases when assessing affordability.
- Home Equity Loan – Ideal when you’ll spend most of the cash right away and you value predictability over flexibility. Every dollar starts accruing interest on day one, so parking half the proceeds in checking means you’re paying to let cash sit idle. Factor in closing costs and be sure the fixed payment still fits your budget if income dips. You want to give yourself a buffer.
Bottom Line: Don’t just compare interest rates. Ask how each option affects both your monthly budget and your long-term obligations. An HEA does not create a monthly bill upfront, but it leads to a growing future cost based on how much your home appreciates. A HELOC may start with low payments during the draw period, but those can rise quickly if interest rates increase or when you begin repaying the principal. A home equity loan begins with a fixed monthly payment that stays the same over time. Whatever option you are considering, make sure it fits your real-world budget now and still makes financial sense in the future.
#3. How Much Will a HELOC, Home Equity Loan, or HEA Cost You?
Before taking on debt — or a future obligation like a home equity agreement — the real question isn’t “Can I get approved?” It’s “Will the money I unlock save or earn more than it will cost me?”
Once your interest rate, or in the case of an HEA, your effective annual cost, climbs into the teens, the math only works in urgent situations like avoiding foreclosure, paying off high-interest debt, or covering essential repairs before a sale.
Here’s how these costs play out in practice.
Home Equity Agreement
Let’s use the popular home equity provider Unlock, as an example (see our Unlock review for more)
With Unlock’s home equity agreement, you get cash today in exchange for giving up a share of your home’s future value.
For example, you might give up 17.5% of your future home value to receive around 10% of your current home value now.
On a $500,000 home, that could mean receiving $50,000 upfront (10% of the current value), in exchange for paying back 17.5% of your home’s future value when you settle.
If your home rises to $650,000 in 10 years — a modest 2.7% annual increase — you’d owe $113,750. That’s $63,750 more than you received, for an effective annual cost of about 12.5%.
For comparison, a $50,000 home equity loan at 8.5% over 10 years would cost around $94,000 total. That’s nearly $20,000 less — and the gap grows wider if your home appreciates faster.
Helpful tip: Remember the Rule of 72: at an 18% effective rate, your cost doubles roughly every four years, turning a $50,000 advance into $100,000 if you’re still in the agreement. Not every HEA climbs that high, but the possibility is real.
HELOC and Home Equity Loan
A fixed-rate home equity loan lets you budget with confidence: the payment and payoff date are locked, and say at a 9% rate the outstanding balance wouldn’t double for eight years.
Because every monthly check chips away at principal from day one, you can look at your amortization schedule and say, “Here’s the exact hit to this month’s budget, and here’s the total cost over time.”
A HELOC typically starts near the same rate as a home equity loan, but the rate floats. If the Fed hikes, your bill jumps. If that higher payment strains your budget—especially if you already carry other variable-rate debt—a HELOC’s flexibility may not be worth the risk.
Bottom line: Always pit the cost of each equity option against the benefit you’ll get from the cash. An HEA makes sense only when you’re solving an urgent, high-interest problem. A fixed-rate loan gives you certainty, while a HELOC offers flexibility—just be sure you can still afford the payment if rates spike.
#4. When and How You Have to Pay the Money Back
No matter which option you choose, your home is on the line. If you can’t repay a loan or settle a home equity agreement, you may be forced to sell your home.
But the way that risk shows up depends on the type of product:
Home Equity Agreement (HEA)
Most HEAs have a fixed term, often between 10 and 30 years. When the agreement ends, you’re required to repay the investor—either by selling your home, refinancing, or using other funds.
If you can’t come up with the money, you may be forced to sell, even if the market is down or you’re not ready to move. The takeaway? You need to be very confident you’ll have options to repay when the clock runs out.
HELOC
A HELOC comes with two distinct periods: a draw phase (typically 5 to 10 years), where you can borrow and pay interest only, and a repayment phase (usually 10 to 20 years), where you start paying back both interest and principal.
Monthly payments can jump sharply once the repayment period begins.
If you plan to sell or refinance, it’s typically easier to do so during the draw period. After repayment kicks in, lenders still allow you to sell or refinance, but you’ll need to pay off the outstanding balance at that time — which may be more difficult if your monthly payments have already increased.
Home Equity Loan
This is the most straightforward option. You begin repaying principal and interest immediately on a fixed schedule.
There are no big payment jumps or end-of-term surprises, and you typically won’t face prepayment penalties. If you sell early, you simply pay off the remaining principal from the sale proceeds.
Bottom Line: All home equity products require a plan to repay, but not all repayment risks are equal. HEAs can create a hard deadline that may force a sale. HELOCs may surprise you with a payment spike once the draw ends. Home equity loans offer the most predictable timeline and are easier to settle early. Choose the option that matches your long-term plan—and make sure you’ll still be able to follow through even if your income drops or life changes.
#5. Risks to Watch For with HELOCs, Loans, and HEAs
Every home equity product comes with tradeoffs. Some risks are obvious, like the chance of foreclosure if you can’t repay. Others are more subtle — like locking up your equity and limiting future borrowing options. As a rule, the more flexibility you gain today, the more long-term control you may give up.
Home Equity Agreements (HEAs)
HEAs carry some of the highest long-term risk. Most providers cap the effective annual cost at around 18% to 20%, compounded monthly, meaning your settlement amount can grow by roughly 18% to 20% per year. That means the upfront money could potentially double in just four years under the cap.
Because the investor isn’t a traditional lender, they don’t foreclose in the typical sense. However, the contract can still require you to sell your home if you can’t buy them out or refinance by the maturity date — usually 10 to 30 years from the start.
And if this becomes your third lien — for example, after a mortgage and a HELOC — your options for future borrowing may be severely limited. Most lenders won’t underwrite another loan with that much existing leverage.
HELOCs
HELOCs give you flexibility in the early years, but that freedom can backfire. Payments are often interest-only for the first five to 10 years, but once the draw period ends, repayment starts — and monthly costs can spike dramatically.
Most HELOCs have variable rates tied to the prime rate. You may see rates from nearly 7% to as much as 18%, depending on your creditworthiness.
Unlike HEAs where high costs are based on appreciation, HELOC rate spikes depend on Federal Reserve policy.
Home Equity Loans
Fixed-rate loans are the most predictable option. Your monthly payment and payoff date are locked in, and there’s no surprise jump in costs down the line.
But that certainty comes at a price: the loan funds all at once, so you start paying interest immediately, even if you’re not using the full amount. And because it’s a second lien, it reduces your ability to tap your home again unless your mortgage is paid down significantly.
Bottom Line: Risk tolerance should drive your choice. HEAs offer the most flexible qualification but carry the highest potential long-term costs, especially if your home appreciates significantly. HELOCs provide short-term payment relief but expose you to rate volatility and payment shock. Home equity loans offer the most predictable timeline but limit your flexibility once you borrow.
#6. Taxes, Deductions, and What Your Family Inherits
The tax treatment of home equity products varies dramatically — and the differences can add up to thousands of dollars in savings or unexpected bills. Here’s what you need to know about each option.
Home Equity Agreements (HEAs)
The upfront cash isn’t taxable income, but there’s no annual interest deduction either.
Although you’re giving up a share of your home’s future value, you’re still taxed as if you sold the entire property yourself.
That means the full sale price is reported as your gain — not just the amount you keep after settling the agreement. If your home appreciates significantly and pushes you over the $250,000 (single) or $500,000 (married) capital gains exemption, you could owe taxes on that excess.
This can come as a surprise, especially if the investor’s share of appreciation is large. Between taxes and the payout owed to the HEA provider, your available cash at sale could be far less than expected.
And while it’s true this tax exposure could happen even without an HEA — just from holding onto equity — the combination of reduced ownership and unexpected taxes can feel like a double hit.
For inheritance, HEAs create unpredictable obligations. Your heirs don’t just inherit a house — they inherit the investor’s claim on future appreciation. If they want to keep the property, they may face a massive buyout payment when the agreement matures. If they sell, the investor takes their contractual share first.
Home Equity Loans and HELOCs
Interest is tax-deductible only if you use the funds to “buy, build, or substantially improve” your home — think kitchen renovations or room additions, not debt consolidation or vacations.
You must itemize deductions to claim this benefit, and for 2025, that only makes sense if your total deductions exceed $15,000 (single) or $30,000 (married filing jointly).
When you die, your heirs inherit the property with its debt intact. Family members can often assume the loan under the original terms, or they can pay it off, sell the property, or refinance. The debt amount is more predictable, making estate planning straightforward.
Bottom Line: Traditional loans offer predictable tax benefits and estate planning, while HEAs defer taxes until settlement and create uncertain inheritance obligations. If tax deductions matter to your situation, traditional loans provide annual benefits. If you’re planning your estate, traditional loan balances are known quantities, while HEA obligations depend on future appreciation — making them much harder to plan around.
Who Each Option Is Best For
Now that we’ve broken down the tradeoffs, let’s tie it all together.
The best product for you depends not just on your credit score or how much equity you have — it depends on what you need the money for, how quickly you can repay, and what risks you’re willing to accept.
Home Equity Agreement (HEA) — Best for:
- Homeowners with significant equity but poor credit and/or low or hard-to-document income
- People who don’t qualify for traditional loans but need a short-term cash boost
- Retirees under 62 who are house-rich but cash-poor (See how the two options compare in our guide to Home Equity Agreements vs. Reverse Mortgages.)
- Situations where avoiding monthly payments is more important than minimizing long-term cost (e.g., avoiding foreclosure, covering medical bills, prepping a home for sale)
But: HEAs usually carry the highest potential long-term cost and are best viewed as a last resort, not a first choice.
See our list of best home equity agreement companies.
HELOC — Best for:
- Borrowers with strong credit and staggered cash needs, such as phased renovations
- People who can manage interest-only payments responsibly and want flexibility to draw as needed
- Anyone who may repay or sell before the draw period ends
- Savvy borrowers who are comfortable with variable rates
But: HELOCs can become expensive fast if rates rise, and repayment can spike after the draw period ends.
Home Equity Loan — Best for:
- Borrowers with good credit and a single, large upfront need (e.g., debt consolidation, medical expense, one-time remodel)
- People who value predictable monthly payments and prefer a fixed payoff schedule
- Those who don’t need ongoing access to funds
But: You pay interest on the full amount from day one, so unused funds still cost you.
Bottom Line
Choosing how to tap your equity is one of the bigger financial decisions a homeowner can make. Each option comes with different tradeoffs, and no one product is “better” in every situation.
If you’re uncertain where you stand, a smart next step is to:
- Run your numbers. Use budget and amortization tools to map out monthly cash flow.
- Get quotes from multiple providers. Especially for HEAs — the real cost varies widely.
- Talk to a fiduciary advisor. Someone who’s not selling the product can help you weigh what fits your goals, not someone else’s commission.
