Home equity sharing is an innovative financial model that enables homeowners to leverage their home’s equity without the burden of additional debt.
Instead of traditional borrowing — which comes with the obligation of monthly payments — homeowners agree to pay a set proportion of their home’s future value in exchange for an interest-free lump sum of cash.
Home equity sharing is gaining momentum as a compelling alternative in today’s financial climate, which is marked by robust housing market prices but high interest rates. It’s particularly alluring for homeowners with substantial property equity who find themselves in a liquidity crunch due to credit constraints or financial adversity.
If you’re considering an equity sharing agreement, understand that it’s not as simple as getting a HELOC or a home equity loan. Here’s a look at the advantages and potential drawbacks you need to be aware of.
Benefits of Home Equity Sharing
Home equity sharing offers numerous benefits, particularly for those seeking an alternative to traditional loans. Here are its most significant advantages.
#1. Has No Debt or Monthly Payments
Home equity sharing is an investment agreement, not a loan. Therefore, you avoid accruing additional debt, which can bring short-term relief.
Moreover, home equity sharing exempts you from ongoing interest charges (a common downside to traditional loans). This results in improved cash flow, providing more financial flexibility to allocate funds towards other aspects of your life.
Additionally, since home equity sharing isn’t a loan, it doesn’t impact your credit score.
This can free up room to use the funds for credit enhancement, such as paying off high-interest debt, thus lowering your debt-to-income ratio (a crucial factor in creditworthiness).
#2. Provides Access to Cash Without Income or Credit Requirements
Home equity sharing sets itself apart by focusing primarily on the value of your home rather than your income or credit history. This is a marked departure from the approach of traditional lenders, who heavily consider these elements when assessing your eligibility for a home equity loan or line of credit.
This attribute of home equity sharing makes it a flexible and accessible option for a broader range of homeowners.
Even if your income is lower than what traditional lenders would prefer, or if your credit history has some blemishes, you still have a strong chance of qualifying for a home equity sharing agreement.
Furthermore, those in retirement or self-employed individuals (who may have inconsistent income streams) can particularly benefit from this type of arrangement.
#3. Diversifies Net Worth and Mitigates Market Risks
Home equity sharing agreements can help homeowners diversify their net worth and better manage financial risk. While this strategy isn’t without potential costs and risks, it can make sense in situations where a home represents a significantly high portion of a person’s net worth.
Suppose you have $500,000 of equity in your home but only have $50,000 in diversified investments. So, you enter into a home equity sharing agreement and sell $150,000 of your home’s equity today.
You then invest the proceeds to diversify your overall balance sheet. In this way, home equity sharing enables you to spread the risk and potentially generate income.
What’s important to understand is that home equity share agreements are not a “cheap” way to deleverage yourself.
We ran some numbers in an example below, comparing home equity share agreements to personal loans. And with an average appreciation of home value, it was equivalent to taking out a personal loan with an 8% APY.
In other words, you’re likely not going to come out ahead in this scenario. But what you gain is protection against a large drop in the value of your home, which is important for those who are relying on their home equity to fund a large portion of their retirement.
#4. Offers a Potential Discount for Early Buyouts
Some home equity sharing companies provide discounts for an early contract buyout.
One instance when this may be beneficial is if you anticipate undertaking substantial home improvements that would significantly boost your home’s market value, with the intention to sell it immediately after the renovations are complete.
For example, let’s say that your home has structural issues or outdated elements that make it challenging to sell in its present condition. Using the funds from home equity sharing, you can finance these necessary repairs or renovations, effectively making your property more marketable.
An early buyout post-renovation, with a company that provides a discount, would mean sharing less of the appreciated value with the home equity sharing company upon sale, potentially optimizing your net profit.
For an in-depth look at the leading providers, see our guide to the best home equity sharing companies.
Cons of Home Equity Sharing Agreements
There are legitimate drawbacks to home equity sharing agreements, many of which can have lasting financial implications
#1. Giving Up a Portion of Your Home’s Value and Appreciation
The most significant downside to home equity sharing is that you’re giving up a portion of your home’s value and future appreciation.
For many people, their home is a significant portion of their net worth because it’s a form of forced savings. You could be jeopardizing your long-term financial stability by selling off a portion of your home’s value and not replacing it with another appreciating asset.
Consider an example where you own a $500,000 home and enter into a home equity sharing agreement, selling 10% of your home’s current value (which is $50,000). In return, the home equity sharing company acquires a 16% stake in your home’s future value.
Fast forward 10 years. Let’s say your home’s value has appreciated to $800,000. The equity-sharing company is now entitled to $128,000 (16% of the home’s total value). Therefore, instead of receiving the full $800,000 from your home’s appreciation, you’d receive $672,000.
#2. Carries a Forced Sale Risk
One overlooked risk associated with home equity sharing agreements is the potential for a forced sale — particularly for homeowners who stay in their homes long-term.
If there’s no home sale within the designated period, most contracts stipulate that a substantial fee becomes due when the agreement ends (typically 10 to 30 years). This fee is calculated based on the home’s value at that point in time.
Suppose you haven’t sold your home, but the contract has expired and you cannot refinance or buy out the company from the agreement. In that case, you may face the unwelcome scenario of selling your home in order to meet your contractual obligation.
This is a significant risk for those who plan to age in place, or who want to keep their house in the family.
#3. Uses Complex and Non-Standard Contracts
Unlike traditional mortgages and HELOCs, home equity-sharing contracts are not standardized. Each company operates differently, so it’s crucial to understand the terms and conditions of your agreement thoroughly.
Due to the complexity of these contracts, it can be easy for homeowners to get burned if they are unable to comprehend the terms fully.
For example, each company approaches aspects like property renovations differently. Some might require pre-approval for any major renovations. In contrast, others may have conditions impacting the payout at the end of the contract if renovations have significantly increased the home’s value.
While you may not consider renovations now, your needs or wants could change.
Additionally, in the unfortunate event of your passing, your heirs may be left to navigate this complex agreement. A contract they may not fully comprehend could lead to unexpected financial consequences.
Furthermore, many home equity sharing companies are relatively new and lack a long track record. For example, Noah (an early player in the industry) has gone out of business and transferred its assets (i.e., the home equity agreements) to another party.
#4. Limits Control Over Your Home’s Maintenance and Improvements
When you enter a home equity sharing agreement, you may have less control over your home’s maintenance, improvements and other decisions. For example, you may want to add a pool or rent out your place, but the home equity sharing agreement might prevent those actions.
Moreover, the contract might dictate whether or not it makes financial sense to invest in certain upgrades or renovations. The various home equity companies treat upgrades differently. Some might discount the final value of your home based on these upgrades, while others don’t.
If you decide to make improvements, you may have to foot the entire bill while sharing the appreciation resulting from those improvements. This can be particularly problematic in more extended agreements, as your preferences and needs can change.
#5. Has Complex and Potentially Pricey Fees
Home equity sharing agreements come with a detailed and potentially expensive fee structure. This includes not only the share agreement amount itself, but other fees as well.
Let’s use Unlock (a notable home equity-sharing company) as an example.
Let’s say you received $50,000 (10% of your home’s value) from Unlock, in exchange for 16% of the total future home value on a house initially worth $500,000.
After 10 years, assuming an average annual appreciation of 3%, your home would be worth $671,958. Your payback to Unlock would be 16% of this value, amounting to $107,513.
Hence, you end up paying $57,513 more than you received — equivalent to an effective annual interest rate of 7.95%.
Additional fees include a 3% origination fee on the amount received, which would equate to $1,500 in this example.
Homeowners are then responsible for appraisal and home inspection fees at the beginning and end of the agreement. These vary, but typically fall between $300 and $400.
All these expenses add to the complexity and potentially high cost of home equity sharing agreements.
How Does Home Equity Sharing Compare With Other Options?
When you’re considering tapping into your home equity, it’s essential to weigh all your options.
Traditional methods like a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance usually require a decent credit score and steady income, and they often come with monthly payments.
In contrast, home equity sharing is a viable alternative for those who might not qualify for these traditional options.
At the same time, it’s crucial to understand that while home equity sharing offers immediate financial relief without monthly repayments, it does come with a long-term cost.
To illustrate, let’s use that same Unlock example we used in the previous section.
Suppose you receive $50,000 upfront (10% of your home’s value) from Unlock in exchange for 16% of the total future home value. After 10 years, if your home has appreciated annually by 3%, your payback to Unlock would be $107,513, which is $57,513 more than you initially received.
This “extra” you pay back can be likened to an “effective interest rate” on the initial sum received.
To understand this better, imagine this extra amount as the cost of the money you received upfront. If you treat this cost like interest on a traditional loan and calculate the corresponding annual rate, you would have an effective interest rate. In this case, that effective interest rate is about 7.95%.
Considering that we’re currently at higher interest rates, a 7.95% effective interest rate is very fair for someone without a solid credit score or a consistent source of income.
Still, remember that home equity sharing isn’t a loan; it’s an investment in your property. So, this isn’t an apples-to-apples comparison. This calculated rate is a way to translate the cost of this agreement into terms that can be compared with traditional loans.
But as shown above, there are a lot of drawbacks that come with these investments that more traditional methods don’t have.
Reviews of Home Equity Sharing Companies
If you’re interested in home equity sharing, here’s a brief rundown of the major companies in this space.
- Point: This company allows for agreements of up to 30 years and up to a 70% loan-to-value ratio. They have a flexible buyback policy and are lenient with credit score requirements. Read our full Point review here.
- Unlock: Unlock allows for partial buybacks of your home equity agreement. Their contracts are shorter, maxing out at 10 years, but they offer great flexibility for homeowners. Read our full Unlock review here.
- Hometap: This company is great for homeowners with average credit, allowing for a loan-to-value ratio of up to 75% and a maximum agreement length of 10 years. Read our full Hometap review here.
- Unison: Ideal for homeowners with high-value properties, Unison provides agreements of up to $500,000. Their minimum credit score is 620, and their maximum loan-to-value ratio is 80%. Read our full Unison review here.
Are Home Equity Sharing Agreements Worth It?
Determining if a home equity sharing agreement is worth it depends on your financial circumstances, needs and long-term objectives.
In certain situations — such as people who are in retirement with limited assets but significant home equity — these agreements can provide a way to sustain your lifestyle in your chosen location.
In other scenarios — like when you’re aiming to finance a remodel — pursuing traditional borrowing options might be more beneficial. For instance, I used a HELOC to fund a recent renovation project.
However, if you’re dealing with severe financial difficulties like business loss or potential bankruptcy, the high opportunity cost of not tapping into your home equity could justify this choice.
If you’re considering this option, explore our article on the best home equity-sharing companies and detailed reviews of each company to equip yourself with all the necessary information.
