What is a home equity agreement? How it compares with a HELOC or home equity loan.

Core Insights - Homeowners are increasingly considering home equity agreements (HEAs) as an alternative to traditional borrowing methods due to high mortgage rates and the desire to avoid additional monthly payments [1][3][12] Group 1: Home Equity Agreements Overview - A home equity agreement allows homeowners to receive a lump-sum cash payment in exchange for a share of the home's future value, typically settled when the home is sold or refinanced [2][3] - HEAs are distinct from traditional mortgage products, as they do not involve monthly payments or interest rates, making them appealing to homeowners looking to manage their budgets [6][12] - Companies like Hometap, Point, Unison, and Splitero specialize in HEAs, working directly with homeowners without intermediaries [4] Group 2: Mechanics of Home Equity Agreements - The process begins with a home appraisal to determine available equity, followed by an investor offering a lump-sum payment based on that valuation [5] - The amount owed at settlement is contingent on the home's appreciation or depreciation, meaning if the home's value decreases, the homeowner's obligation also decreases [6][10] - Typical terms for HEAs range from 10 to 30 years, with upfront fees similar to other home equity lending options, generally between 3% to 5% of the payout amount [7][13] Group 3: Comparison with Other Financing Options - HEAs differ from home equity lines of credit (HELOCs) and home equity loans, as HELOCs require monthly payments and increase debt load, while HEAs do not [11][12] - Home equity loans provide a lump sum with fixed rates and predictable payments, whereas HEAs offer flexibility at the cost of predictability [13] - Financial advisors often recommend HEAs for homeowners who are equity-rich but cash-constrained, allowing access to capital without additional monthly obligations [14][15] Group 4: Considerations and Challenges - The cost of a home equity agreement can be difficult to ascertain upfront, as there are no monthly payments or interest rates to compare directly with traditional options [16][21] - Financial advisors urge caution, emphasizing the importance of understanding the total cost over time rather than focusing solely on the absence of monthly payments [21] - Home equity agreements are not regulated like traditional mortgages, leading to varying oversight and protections depending on the state and contract [23] Group 5: Alternatives to Home Equity Agreements - Homeowners hesitant about HEAs may consider traditional home equity loans, smaller HELOCs, or cash-out refinancing as alternatives [24][25] - Cash-out refinancing can provide access to cash with a fixed monthly payment, although it may involve trading a low mortgage rate for a higher one [25]