Home Equity Sharing Agreements: How They Work & Where to Find Them
If you want to tap into home equity without owing payments, an equity sharing agreement could work. Shared equity agreements let you sell equity to investors. These are offered by companies such as Hometap, Patch, Point, and Unison.
When you have a lot of equity in your home, you want to use it for other purposes, such as consolidating credit card debt or funding home improvements. Home equity loans are one way to access that equity, but you have to make monthly payments and pay interest on these loans. Equity sharing agreements are another option, and they may work better for people who don’t want to be burdened by ongoing payments.
With shared equity agreements, you sell some of your home equity to an investing company. You don’t make monthly payments but instead pay back the loan when you sell the home or after your shared equity contract expires. You’ll lose partial ownership of your property with these agreements, but you’ll get access to interest-free cash, and you also offload some of the risk of falling home prices.
This guide will cover the basics of home equity sharing agreements, provide some insight into who they are right for, and offer suggestions for some lenders to consider if you’re interested in an equity sharing agreement for your home.
In this guide:
- 4 Home Equity Sharing Agreements to Consider
- What is a Shared Equity Financing Agreement
- Benefits of a Shared Equity Agreement
- Downsides of a Shared Equity Agreement
4 Home Equity Sharing Agreements to Consider
Home equity sharing agreements are a relatively new service, but there are a handful of companies out there offering them. Here are our top picks:
Hometap launched in Massachusetts in 2017 and is currently serving homeowners in six states: Florida, New York, North Carolina, Virginia, and California, in addition to the company’s home state. The company is currently aiming to double its reach.
Here’s what you need to know about an equity sharing agreement from Hometap:
- LendEDU Rating: 5.00
- Maximum investment: $250,000
- Maximum loan-to-value ratio: 75%
- Loan terms: 10 years
- Fees: 3% of investment and closing costs
Patch Homes is currently available in major metro and suburban areas in the state of California. The company is planning to branch out into new areas soon, and you can sign up to be notified when Patch becomes available in your area. Patch’s stated goal is to redefine the homeownership model by making it easier for homeowners to access the equity in their homes.
Here’s what you need to know about an equity sharing agreement from Patch:
- LendEDU Rating: 4.65
- Maximum investment: $150,000
- Maximum loan-to-value ratio: 85%
- Loan terms: 10 years
- Fees: Servicing fee of 3% of the requested financing amount before funds are transferred; No prepayment fees
Point can help you tap into the equity in your home quickly, as instant pre-approval or denial is available in under a minute. After getting pre-approved, you’ll talk to a home equity expert about how Point works. You can then fill out an online application and upload documents directly to make the process quick and easy.
Here’s what you need to know about an equity sharing agreement from Point:
- LendEDU Rating: 3.92
- Maximum investment: $250,000
- Maximum loan-to-value ratio: 80%
- Loan terms: 10 years
- Fees: 3% to 5% service fee
Unison is based in San Francisco and provides both home equity share agreements as well as home down payment assistance to homeowners in exchange for a share in future home appreciation. You can convert up to 17.5% of your home’s value to cash using Unison with no monthly payments to worry about. Funds are also available in as few as three days from when you sign your offer letter and closing package.
Here’s what you need to know about an equity sharing agreement from Unison
- LendEDU Rating: 3.77
- Maximum investment: $500,000
- Maximum loan-to-value: 80%
- Loan terms: 30 years
- Fees: 3.90%
We ranked and rated the top home equity sharing companies based on the weighted average of seven data points to determine how they stack up:
- BBB Rating: 10%
- Trustpilot Rating: 10%
- Maximum Investment: 15%
- States Available: 5%
- Servicing Fee: 25%
- Percentage Share: 25%
- Investment Percentage: 10%
What is a Shared Equity Financing Agreement
When you enter into a shared equity financing agreement, you receive a lump sum investment in exchange for a portion of your home equity. You don’t have to make payments on this money because it is a sale rather than a loan. The investor is buying partial ownership of the house.
Your initial agreement specifies when you have to buy back the equity sold to the investor. In most cases, you have a 10-year maximum term, so have to repay investors by the end of this period of time—although you also have the option to buy out their ownership before the end of the term. You might also repay investors by giving them their portion of the home’s purchase price after you sell your property—if you do so before the 10-year term expires.
The amount you can initially obtain is based on the value of your home and the amount of equity you have in it. Different lenders have different limits and requirements, but typically, you’ll be limited to a maximum loan amount between $150,000 and $250,000, and your total home debt can’t exceed 75% to 85% of the value of your home (including debt acquired from the sale). So, if you only have 20% equity in your home, you won’t be able to sell much to a home equity sharing company, if any at all.
When you pay back the investors, your repayment is based on how much your home has gone up in value. In other words, you share a part of the home’s appreciation with the investors. If your home went down in value, your payment is also generally going to be lower because investors share some of the risk of falling property values with you.
It’s important to understand the distinction between home equity sharing agreements—which allow you to cash in equity you already own—and a shared appreciation mortgage—which allows you to co-buy a new home with your lender.
Benefits of a Shared Equity Agreement
There are some significant benefits of a shared equity agreement, including the following:
- You don’t have to make monthly payments. Unlike other loans that let you tap into home equity, you do not have to pay interest or repay principal each month when you enter into an equity sharing agreement. Instead, the investing company is paid through ownership interest when you resell the home (or buy them out of the agreement).
- Investors share the risk. If property values fall, the investors who entered into the equity sharing arrangement will share the loss with you.
- Equity share agreements may be easier to qualify for if your credit isn’t great. Since these agreements aren’t loans but are instead investments in your property, you may have an easier time qualifying for one if you have a low credit score.
>> Read More: How to Qualify for a Home Equity Loan With Bad Credit
Downsides to Shared Equity Agreements
There are also some downsides to consider:
- You could miss out on growth if home prices go up significantly in your area. You won’t fully benefit from your home’s future appreciation because some of the gains are promised to investors.
- You could end up paying much more than with a traditional home equity loan. This is likely to happen if property values rise.
- You have a shorter time to repay investors. Most investors making home equity sharing agreements must be repaid within 10 years or less, which makes these loans a bad choice for people who want long-term financing.
- You need sufficient equity in your home. You usually can’t enter into an equity sharing agreement if you owe a lot on your home.
- Your equity may be undervalued. Some lenders make a risk adjustment to the value of your home to protect their investment. This depends on how your agreement is structured, but it means you may not get the full value of the equity in your home.
- You might not get the full value of future home improvements. Some lenders also take a portion of the value of any future home improvements you make, while others separate out any appreciation that comes from home upgrades. You’ll need to ask your lender how they handle these situations.
- You’ll still be responsible for taxes and insurance. Generally, selling equity in your home doesn’t offload your full responsibility for property taxes and homeowners insurance.
- You’ll have to pay appraisal fees. Typically, the investing company will require you to get the fair market value of your home estimated by a licensed appraiser before they offer a final investment amount.
Bottom Line: Should You Take Out a Shared Equity Loan?
If you are considering a shared equity loan, be sure to weigh the pros and cons and compare what you could end up paying to a standard home equity loan or home equity line of credit. If you’d prefer to keep the equity in your home and fully benefit from appreciation, a home equity loan may be better for you. But, if you don’t want monthly payments and want to diversify out of real estate, a shared equity loan could be a good way to do it.