If you’re a homeowner with over 20% equity in your property, you may like the idea of tapping into that wealth without selling your home or taking on debt.
Home equity sharing agreements are one alternative that can give you these benefits. But at what cost?
This article explains in basic terms how these agreements work. We’ll look at what to know before signing up, what happens during the agreement, and what your options are for ending the contract.
Plus, we’ll provide specific examples to illustrate these agreements’ short-term and long-term financial implications.
Home Equity Sharing Agreements 101
Home equity sharing agreements are a type of home equity investment in which a homeowner and an investor — usually a specialized home equity sharing company — form a partnership.
The investor provides an upfront cash payment, which the homeowner can use freely. However, this cash comes in exchange for a slice of the home’s future worth.
Imagine you own a house valued at $500,000. You then work with a home equity sharing company that provides you with $50,000 upfront — the equivalent to 10% of your home’s value.
The money you receive today does not translate to what you’ll repay later.
For example, you may get 10% of your home’s value today, but agree to give up 20% of your home’s future value.
This difference, wherein you repay more than you received, is how home equity sharing companies make money and protect their investments.
In this example, if your home’s value does not increase over the duration of the agreement, you would owe the company 20% of the house’s value, or $100,000. Essentially, you’d repay $100,000 for the $50,000 you received.
This percentage is fixed, even if the house does increase in value.
In other words, if your house value doubles from $500,000 to $1 million over 10 years, your repayment would increase to $200,000.
While the details vary among companies, the common principle is that you owe a bigger portion of your home’s value than the equity you initially sold. In addition, the investor also benefits from your home’s appreciation.
Benefits of Shared Equity Agreements
- No monthly payments. Shared equity agreements don’t necessitate monthly payments like traditional home equity loans. This feature can be a lifeline for homeowners facing short-term financial difficulties, who can’t afford to take on any additional month-to-month expenses.
- More forgiving underwriting. Home equity-sharing companies require lower credit scores than traditional lenders, and some companies don’t even have an income requirement.
- Shared risk. Both parties share potential risks and rewards linked to future home value changes, potentially reducing homeowner liability during a downturn.
Drawbacks of Shared Equity Agreements
- Reduced future gains. Homeowners surrender a slice of their home’s future value, which is substantial if the property value increases over time.
- Limited flexibility. Shared equity agreements often impose terms that restrict a homeowner’s ability to sell or refinance without clearing the investor’s stake.
- Cost and complexity. These agreements can be more intricate and costly than traditional home equity loans due to extra legal requirements and potentially higher fees.
For a deeper understanding of the financial implications, read our dedicated article on the pros and cons of shared equity agreements.
Before Entering a Home Equity Sharing Agreement
Before entering a shared equity agreement, your first step is to know exactly what you will use the funds for.
One thing I’ll repeat is that every company operates differently.
This isn’t like a HELOC or a personal loan, where the contract is essentially standardized and all that changes from company to company is (for example) the loan’s interest rate.
One example is how a company shares in the appreciation of a home through remodeling.
Specifically, if you use your funds to remodel, thereby increasing the value of your home, how does this affect the eventual payout you will owe to the equity sharing company?
In some cases, the company adjusts the final appraised value, so you’re not sharing the amount you received from the appreciation. In other cases, no adjustment is made. So, you may end up paying for 100% of the remodel, then sharing the increase in value that results from that remodel.
There are several differences like this among the major home equity sharing companies (Point, Unlock, Hometap and Unison).
We’ve written reviews of these companies detailing how these small differences work.
Once you know what you’ll use the funds for, read the individual reviews before applying so you’re not surprised by the differences.
To highlight some of the differences between these providers, here are a few key facts:
| Company | Max Funding Amount | Credit Score Requirement | Max Loan to Value Ratio | Terms |
| Point | $500,000 | 500 | 70% | Up to 30 years |
| Unlock | $500,000 | 500 | 80% | 10 years |
| Hometap | $600,000 | 500 | 75% | 10 years |
| Unison | $500,000 | 620 | 80% | Up to 30 years |
What to Expect During Underwriting
When applying for a home equity sharing agreement, companies will first offer you an initial estimate based on your preliminary application.
After this, you’ll enter the underwriting stage, where the investor assesses your eligibility and potential risk based on your financial profile and your home’s value. During this phase, the finer details of the agreement (including the specifics of how much you’ll owe) are negotiated and finalized.
While home equity sharing companies have lower credit requirements than traditional lenders, these factors can still affect how much you’ll have to pay back.
For example, if you have a bad credit profile, you might go from an initial estimate of paying back 18% of the home’s value to needing to forego 20%. While a 2% difference might seem minor, in real terms, for a $500,000 home, this equates to an extra $10,000 you’ll owe to the equity sharing company.
It’s here that you’ll get your home appraised to determine its current market value and available equity. Be prepared to cover the cost of the appraisal yourself.
The entire process can take anywhere from a few days to a few months, depending on the investor and the complexity of your situation.
Evaluating Your Home Equity Share Agreement
It’s important to carefully evaluate a home equity share agreement, focusing primarily on the equity share percentage. For instance, let’s consider the home equity sharing company Point.
Here’s how a typical agreement might work with Point:
Suppose your home’s appraised market value is $500,000, and you’re looking to tap into $50,000. This represents a 10% equity stake in your home’s market value.
First, Point applies a risk-adjusted value to your home, typically between 25.5% and 29.5%. This value is derived from your risk profile, which includes factors like your credit score, the amount of equity in your home, and its location.
This adjustment lowers the initial agreed value of your home. If the risk-adjusted rate is 25.5%, the starting value of your home with Point would be $372,500.
During the underwriting process, Point provides you with a percentage of the home’s future appreciation that you’ll be required to share. This is the appreciation over the risk-adjusted home value.
In this example, if you receive $50,000 of cash upfront and Point agrees to a 20/80 split, Point would be entitled to 20% of any appreciated value over $372,500 (not $500,000), while you retain 80%. Plus you’ll have to repay the $50,000 you received.
Now let’s look at how Unlock operates, as the terms differ.
How Unlock agreements work is that instead of taking a share of appreciated value, you agree to sell them a share of the home’s total value. In this case, there is no risk-adjusted value to your home.
The agreement will look something like this: you get 10% of your home’s current value in cash today, and owe 18% in the future (at the end of the agreement or when you sell).
Beyond the repayment value, other things you’ll want to understand about the contract are:
- Agreement duration and termination options. Familiarize yourself with the length of the agreement and the available options for ending it. Some companies’ contracts expire after 10 years, and you may be forced to sell if you can’t repay.
- Fees and closing costs. Be aware of any fees or closing costs associated with the agreement. These may include underwriting fees, appraisal costs, and other charges. In certain cases, such as appraisal fees, you may be responsible for paying this fee prior to taking out an agreement and prior to paying back the equity sharing company at the end of the deal.
- Maintenance and improvement obligations and restrictions. Understand your responsibilities for maintaining and improving your home during the agreement, as well as any restrictions placed on making changes to the property. For example, if your home needs a new roof and you neglect this, it could negatively impact the value of your home and breach your agreement, which could actually raise the final payment owed to the home equity sharing company. Plus, understand whether the company shares in the appreciation from larger renovations.
See our list of the best home equity-sharing companies for more specifics on how each company works.
How to End or Get Out of a Home Equity Share Agreement
Home equity share agreements typically last for 10 to 30 years.
There are four ways to get out of a contract, either at the end of their term or prior.
#1. Selling the Home
The most common way to end a home equity share agreement is by selling the home. When the homeowner decides to sell their property, the proceeds from the sale are used to pay off the investor.
After any other liens or mortgages on the property are paid off, the homeowner keeps the remaining equity.
#2. Buying Back the Investor’s Share
Another option for ending a home equity share agreement is for the homeowner to buy back the investor’s share.
This can be done at any time, subject to certain conditions and fees outlined in the agreement.
By buying back the investor’s share, the homeowner regains full ownership and control of their property and its future value. This option might appeal to those who have experienced an increase in their financial stability or want to eliminate the investor’s stake in the home.
This can be accomplished with a large cash payment or through a refinance.
#3. Partial Buyback
Unlock offers homeowners a unique option: the ability to partially buy out their contract. This gives homeowners greater flexibility in managing their home equity and financial situation.
For example, you can buy out half of the contract at the end of five years, based on the appraisal value at the time.
Read our Unlock review to understand more of the details and an example of a partial buyback.
#4. The Contract Expires
When a home equity agreement ends — whether it’s after 10 years or 30 years — the homeowner must pay the amount due as outlined in the contract.
It’s essential for homeowners to be prepared for this eventuality, as it can have significant financial implications if they’re unable to make the payment.
Homeowners must find a way to come up with the funds to pay off the contract. One option is refinancing their home, which can provide the necessary cash. However, this depends on the homeowner’s credit rating and their ability to qualify for refinancing.
Refinancing introduces interest rate risk, as homeowners who currently have a low interest rate may be forced to refinance at a higher rate. This can lead to increased monthly payments.
If a homeowner cannot refinance or find another way to pay off their Unlock contract, they may be forced to sell their home.
Understanding the Math of a Shared Equity Agreement
To fully understand the financial implications of shared equity agreements, it’s helpful to delve into some practical examples.
In the following case studies, we’ll simulate scenarios using Unlock and Point.
Each scenario assumes different levels of home value appreciation to show the impact of this key variable on the outcome of the agreement.
Case Study #1: Average Home Appreciation With Unlock
Let’s examine a hypothetical scenario using Unlock:
- Home value: $502,000
- Upfront cash received: $94,000
- Equity share: 38%
- Duration of agreement: 5 years
- Annual change in home value: 3.5%
In this example, the homeowner receives $94,000 today (which represents 18.8% of the available equity in the home) in exchange for 38% of the home’s future value.
If the home appreciates 3.5% annually over five years, its value would be $581,956. At this point, the homeowner will owe Unlock $221,143 (38% of the future home value). The homeowner’s share of the future home value is $360,813 (62%).
While home equity agreements are not loans, we can still calculate their effective interest rate. In this case, the effective interest rate is 18.5% per year (making it a relatively expensive form of financing).
Case Study #2: High Appreciation With Point
Now let’s examine another hypothetical scenario using Point. As explained earlier, Point operates a bit differently than Unlock.
Here are the details of our example:
- Risk-adjusted home value: $365,000
- Upfront cash received: $50,000
- Shared appreciation: 30%
- Duration of agreement: 5 years
- Annual change in home value: 5.75%
With Point, rather than sharing the entire sale price of the home, you’re sharing in just the appreciation over and above the risk-adjusted home value. However, you also pay back the sum of cash you received upfront.
Point calculates your risk-adjusted home value by taking the appraised value of your home and decreasing it between 25.5% to 29.5%.
As an example, let’s say that Point applied a 27.5% discount for the appraised $500,000 home, making the risk-adjusted value $365,000. You would then be required to share the appreciation over and above $365,000.
Then, let’s say that your agreement states that Point receives 30% of the appreciation over the risk-adjusted home value, while you get to keep 70%.
If, after five years, the home’s value is estimated at $661,300 (which is above-average appreciation for home prices), you would owe Point $134,800.
Here’s how the math works:
- You’re paying back the $50,000 you received upfront.
- You’re paying Point 30% of the appreciation over and above $365,000.
30% of the appreciation comes out to $88,890. And if you add the $50,000, you get $138,890.
Yet, because of the significant appreciation in the home’s value, Point applies a Homeowner Protection Cap that limits how much you’ll have to pay them back. In this case, with the cap, the total comes out to $134,800.
In this case, the effective interest rate for the shared equity agreement is approximately 22% per year, making it an even more expensive form of financing.
FAQs About Shared Equity Agreements
The amount of money you can receive from a shared equity agreement depends on the value of your home, the amount of equity you have, and the specific terms of the agreement. Typically, home equity-sharing companies won’t go above a certain LTV, usually in the range of 75%. They then cap the amount of money you can get, with Hometap being the highest at $600,000.
Shared equity agreements generally last from 10 to 30 years. Some companies offer shorter terms, but most agreements are designed for long-term partnerships. At the end of the term, you may have the option to buy back the investor’s share of your home or sell the property.
A shared equity agreement will have tax implications. The money received from the agreement is typically considered a loan and not income, meaning it is not taxable. However, the issue gets complicated once you exit the agreement.
Here are some very general guidelines to keep in mind, based on analyzing the structure of these agreements. These could change depending on your situation:
1. The investment company is usually responsible for taxes on its share of any home appreciation. This means that if you exit the agreement by selling your home, your capital gains tax could potentially be reduced.
2. If you repay the investment company without selling your home, you shouldn’t trigger a capital gains event, since there was no sale. Nonetheless, there is potential for other tax deductions or gains based on the repayment amount.
Given the complexity of tax implications, we recommend consulting with a tax advisor when considering a shared equity agreement
Investors in a shared equity agreement are typically listed on the title or listed as a lienholder of the property. Either way, they have a legal claim to their share of the property and ensure their interests are protected.
Is Home Equity Sharing Right for You?
Home equity sharing agreements can be an expensive form of financing, often seen as a last resort for people who cannot qualify for other forms of finance.
The money received from a shared equity agreement should be used to outweigh the costs, which could make sense when facing options like pulling money out of your 401(K) or facing bankruptcy.
If you qualify for a personal loan or a HELOC, I would recommend those before considering a home equity sharing agreement.
If you’re still interested, the largest home equity-sharing companies include Unison, Point, Unlock and Hometap. Refer to our reviews of these companies and our best home equity sharing companies list for more information and comparison.
Lastly, you can learn even more about these agreements in our guide to the pros and cons of home equity sharing.
