What is a home equity agreement?

If you're looking to tap your home's equity without taking on traditional debt, consider a home equity agreement.

Also known as home equity investments (HEI) or home equity sharing, you can leverage your home's future value for cash without a loan. Instead, you'll sign over a portion of your home's current and future value in exchange for funds that you can use for any purpose.

HEIs are attractive to many homeowners because they don't require strong credit to qualify (unlike HELOCs and home equity loans). The downside? When your term ends, you'll need to pay the principal plus an additional amount based on the property's appreciation. That could be more than twice your original loan amount, and if you can't pay, you could be forced into foreclosure.

CNBC Select outlines more about the product, its risks and our favorite companies in this sector. Additionally, learn more about alternatives and information to help you decide which product is best for you.

A HEI allows homeowners to receive a lump-sum cash payment in exchange for a portion of their home's current value and future appreciation. 

Unlike a home equity loan or line of credit, which is paid in installments, you repay the HEI in one lump sum at the end of your agreed-upon term — anywhere from 10 to 30 years — or when you sell the house. If you fail to meet the terms of your agreement and pay on time, the company can claim your home and force a sale.

In addition to repaying the principal, you need to pay the amount equal to your risk adjustment rate, based on the home's value at the end of the term. If your house has appreciated in value since you signed the agreement, you'll owe more.

For example, your house is worth $200,000 and an HEI company gives you $20,000 for a 10% stake in the property, with a risk adjustment rate of 10%.

The term ends in 20 years and your home is worth $400,000. At that point, you would owe the company $60,000 — the original $20,000 plus 10% of the total appreciation.

To determine how much money you can be approved for, you'll request a prequalification estimate. The HEI company will direct you to obtain a home appraisal, which determines your risk adjustment rate —typically between 2% and 30% of your home's value.

HEIs typically include an origination fee, which is usually between 3% and 5% of the cash equity advance. You'll also have to pay for an appraisal, home inspection, title insurance and escrow services. To avoid more upfront costs, you may be able to have these charges deducted from your payout.

HEIs are not nearly as popular as home equity loans or HELOCs, according to the Consumer Financial Protection Bureau. The four largest HEI companies signed about 11,000 HEI contracts in the first 10 months of 2024, totaling $1.1 billion, per the CFPB's latest data.

Make sure the company you choose has a cap on paybacks, so you're not paying an exorbitant amount when your bill comes due.

Hometap

With Hometap, homeowners can leverage their home's value to secure up to $600,000. HomeTap requires homeowners to settle their investment payment within 10 years, which is shorter than some other companies.

To apply, you must have at least 15% equity in your home and live in one of the 16 states where HomeTap offers HEIs.

Point

Available in 22 states, Point pays homeowners up to $500,000 for a stake in their property.

It offers a repayment term of 30 years, longer than many competitors. However, its risk adjustment fee can reach up to 29%, which is higher than most companies.

The risk adjustment rate is based on the fair market value of your home in the future, so the overall cost of the loan isn't clear until your term ends.

"It's a risky product," Helene Raynaud, senior vice president of business initiatives at Money Management International, a financial services company, told CNBC Select. "Some of these investors will give you up to half a million dollars. All of a sudden, you have all this cash. The important thing is to make sure you understand what you're getting into and can stick to your goals with that money."

The cash from an HEI should be put to good use, like renovating or starting a small business, Raynaud added. If you're taking one out to splurge on a trip or pay off credit cards, consider a different strategy.

Before signing up for an HEI, talk to a housing expert to determine if this is the best option. The Department of Housing and Urban Development provides a list of approved housing counselors.

If you have good credit and a steady income, you might want to consider one of these other options.

Home equity lines of credit (HELOC)

Home equity lines of credit (HELOCs) tap the value of your home to provide a rotating line of credit you can draw on for a set period — which is usually 10 years — during which you'll make interest payments. After the draw period ends, you begin repayment and can no longer use your line of credit. You'll have a set term — typically 20 years — to repay any remaining principal, plus interest.

Like a home equity loan and HEI, your lender can force you into foreclosure for nonpayment.

Home equity loan

With a home equity loan, your lender gives you a lump sum and uses your home as collateral. Most lenders approve home equity loans for 80% of the house's value, but some go as high as 85% or 90%.

Borrowers should have 15% to 20% equity for approval, a credit score of 620 to 680 and a debt-to-income ratio of 43% or less.

The funds can be used for anything — though the interest on the loan is tax-deductible if you use the money for home renovations or repairs. The repayment period for home equity loans is typically between five and 30 years.

Cash-out refinance

With a cash-out refinance mortgage, you'll get a new home loan that is larger than your current one. After paying off your existing mortgage, you can use the excess cash however you want.

Cash-out refinancing usually has a lower interest rate and more flexible credit requirements. But it will take more time to get access to the funds.

Personal loan

Since it's an unsecured debt, a personal loan avoids putting your home at risk. It's also easier to get if you have a less-than-stellar credit history.

Lenders usually cap personal loans at $50,000 or $100,000, and the repayment term is shorter than with a home equity loan, HELOC or cash-out refinance.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Helene Raynaud, senior vice president of business development at Money Management International, a nonprofit debt counseling agency.

Previously, Raynaud worked at the Consumer Credit Counseling Service and the National Foundation for Credit Counseling. She was a senior manager at Fannie Mae from 1999 to 2005.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage product review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best mortgage products.

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