Home equity investment loans are a type of agreement where a homeowner gets a lump sum payment from an investment company, in exchange for giving a percentage of their home’s equity when the agreement terms are over (usually 10 to 30 years). This usually occurs when it’s time to sell.
Thinking about a home equity investment loan but unsure about the details? CreditNinja is here to help you understand all the ins and outs of home equity investment loans.
What is a Home Equity Investment Loan (HEI)?
A home equity investment loan (HEI), also called a shared equity home agreement, is an arrangement where a homeowner receives a lump sum cash payment in exchange for a share of their future home appreciation. This initial investment or agreement is tied directly to movements in the housing market. This is paid back either when the home is sold or when the agreement ends. Typically, the repayment period ranges between 10 to 30 years.
Some consumers tend to turn to HEIs because they may not qualify for traditional lending due to their credit score, income, or other eligibility factors. Investment companies that offer HEIs tend to be more flexible than traditional lenders, including lenders for similar loans like home equity loans or home equity lines of credit.
How Does Home Equity Investment Work?
Home equity investment works by allowing homeowners to leverage their home wealth and potential equity (through appreciation) in order to access funds without taking on traditional debt. These agreements are offered most of the time through an investment company.
The amount paid back will be the principal plus the agreed-upon percentage of the home’s equity, all in one payment. And so, unlike a traditional loan option such as a home equity loan or personal loan, the borrower does not have to make monthly payments, and there are no interest charges involved. It can be a strategic way to finance home repairs or consolidate other obligations.
Repayment typically happens when the homeowner sells the property, refinances, or reaches the end of the contract term, often between 10 and 30 years. The investment company earns a return based on the home’s appreciation, meaning they share in both the potential upside and downside of future home values.
To qualify, homeowners generally need to have sufficient equity in their property, an appraised value that meets minimum thresholds, and pass basic checks such as income verification and income requirements. While this option provides access to cash without adding debt, it also means giving up a portion of the home’s potential future value. If the property appreciates significantly, the repayment amount may be far greater than the originally planned.
Types of Home Equity Agreements
A few types of home agreements (including home equity investment loans/shared equity agreements) are: home equity loans, home equity lines of credit, reverse mortgages, and cash-out refinancing options.
Knowing how all of these options work can be helpful in understanding what will work best for your specific situation. Here is more information about the other types:
- Home Equity Loans — A home equity loan provides a lump sum secured by your home’s value, typically with fixed monthly payments and interest, making it predictable but less flexible than an HEI.
- Home Equity Lines of Credit — A HELOC works like a revolving credit line tied to your home’s equity, giving you the flexibility to borrow, repay, and borrow again, but it comes with variable interest rates.
- Reverse Mortgages — Available only to homeowners aged 62 and older, reverse mortgages allow you to tap into your equity for retirement savings or living expenses, though interest accrues and reduces your home wealth over time.
- Cash Out Refinances — This option replaces your existing mortgage with a larger one, letting you receive the difference in cash for different expenses to consolidate debt, but it also means taking on new debt.
Home Equity Investment Pros and Cons
Some pros of home equity investment agreements include no monthly payments, flexible eligibility requirements, potential lower payments to investors, access to funds without extra debt, and flexible use.
Some cons include the risk and loss of appreciation, being forced to sell your home or foreclosure, the agreement can be passed on, certain restrictions on your home, and complexity.
Below is more detail on each pro and con:
Pros
- No Monthly Payment — Because these borrowing options are not technically loans, there are no payments involved, helping preserve monthly cash flow. For those who already have a tight budget and need access to cash, these can mean financial flexibility.
- Easier Eligibility than Other Options — Approval requirements for HEIs are more lenient when compared to other options, such as home equity loans. And so, if you have a poor credit score or inconsistent income, these may work better for you.
- Potential for a Lower Payment at End of Term — Because the amount you repay depends on the value of your home, if that value depreciates, the amount you owe also decreases. However, it’s important to note that the opposite is also true!
- Doesn’t Increase Your Debt — HEI’s aren’t considered debt and so won’t increase your debt-to-income ratio.
- Flexible Use of Funds — You can use the funds from an HEI for all kinds of expenses, including paying off high-interest debt—both secured or unsecured debt (debt consolidation), medical bills, to finance home improvements, a car purchase, education costs, and more.
Cons
- Risk of Home’s Appreciation — If your home’s value goes up higher than expected, then your home equity investment cost will also increase when it’s time to sell and repay, which could lead to higher out-of-pocket costs than originally planned.
- You Risk Foreclosure or Forced Sale — If you cannot repay your investment company at the end of the term, then you may be forced to sell your property. This may not be a huge deal if you have HEIs on investment properties. However, if it’s your primary residence at risk, then it can be a tough situation to be in.
- Agreement Is Passed On — If you pass away before paying back your investor and your home is inherited, the responsibility for repayment will be passed on.
- You May Have Some Restrictions on Home Renovations — Depending on your agreement, you may have limitations on what you can do to your home, including certain home renovations.
- Complexity of Terms — These agreements with an HEI company can sometimes be more complicated than something like a home equity loan or line of credit. It’s important to understand everything correctly and completely when researching home equity investment companies and contracts. Expert help may be something to consider.
Is a Home Equity Investment Loan a Good Idea?
A home equity investment may or may not be a good idea depending on your plans for the future, your credit history, and your financial goals and situation.
If you have a fixed income and a tight budget, not the best credit score, are okay without complete control of your home, and want to borrow money from your home’s value, then it may be worth looking into. However, it may not be the best choice if you have strong credit, have a lot of income, and want freedom with your home’s future.
Comparing HEI Loans to Other Options
Here we’ll compare HEIs to other loan options that are similar:
| Feature | Home Equity Investment (HEI) | Home Equity Loan | Personal Loan | HELOC (Home Equity Line of Credit) | Cash-Out Refinance | Reverse Mortgage |
| How it works | Lender/investor gives you cash today in exchange for a share of your home’s future appreciation | Lump-sum loan secured by home equity | Unsecured lump-sum loan based on creditworthiness | Revolving line of credit secured by home equity | Replace current mortgage with larger one and take cash difference | Borrow against home equity, no repayment until you leave/sell home |
| Collateral | Your home’s future value (no monthly payment) | Your home | None (unsecured) | Your home | Your home | Your home |
| Monthly payments | None (settled when you sell or refinance) | Fixed monthly payments | Fixed monthly payments | Variable (borrow as needed, repay with interest) | Fixed monthly payments on new mortgage | None while living in home |
| Interest rates | No interest rates/interest payments (investor earns return through home value appreciation) | Fixed rate | Fixed or variable (higher than home equity products) | Variable rate | Fixed or variable | Accrues interest, added to loan balance |
| Use of funds | Flexible (home improvement, debt payoff, etc.) | Flexible | Flexible | Flexible, like a credit card | Flexible | Typically retirement income, paying off mortgage, or covering living expenses |
| Risk | Share of future appreciation owed; could be costly if home value rises a lot | Foreclosure if you can’t repay | Higher rates, no collateral, risk to credit score | Foreclosure risk if not repaid | Foreclosure if unable to repay new mortgage | Lose equity over time; foreclosure risk if terms not met |
| Eligibility | Based on home value and equity, not just credit score | Requires good credit + enough equity | Based mostly on income and credit score | Requires good credit + enough equity | Requires good credit + enough equity | Age 62+ and enough home equity |
| Best for | Homeowners who are equity-rich but cash-poor and want no monthly payments | Borrowers needing predictable payments | Borrowers with no home equity or who want quick, smaller loans | Flexible ongoing access to equity with variable needs | Homeowners wanting to refinance and take out cash with lower rates | Seniors needing cash flow without monthly payments |
Legal and Financial Considerations for HEI Loans
Some legal and financial considerations for HEI loans include their terms (lack of consumer protection compared to loans), state laws that vary, restrictions on what can be done to the home, the agreement following the home’s title, and unpredictability when it comes time to repay your agreement. Here is more detail on those considerations:
- Terms of a HEI Loan/Agreement — Because HEIs are structured more like investments than traditional loans, they do not carry the same consumer protections and consumers may not have the right to refinance or restructure terms with home equity investment companies like they can with lenders if financial circumstances change.
- State Laws Can Vary Quite a Bit — Each state regulates home equity investments differently, so depending on where you live, the level of oversight, disclosure requirements, and homeowner protections can range from very limited to fairly strict.
- Limitations to Home Repair and Improvement — Many investors require that a homeowner ask for permission before they make any large changes to their home, and they may not always be okay with potential changes.
- Unpredictability With Final Payment — Since repayment depends on the future value of your home, the amount you owe at the end of the agreement would be significantly higher than expected, especially if the housing market grows rapidly and your home’s appraised value increases. And unlike a traditional loan, you’ll need to prepare for these costs without predictable closing cost structures. Some agreements may also include charges such as an origination fee, ongoing property taxes, or transaction costs.
CreditNinja’s Final Thoughts on Home Equity Investments
Just like any other financial decision, CreditNinja urges you to do proper research before signing up for home equity investments. These options are best suited for those who have poor credit, have equity in their home but don’t have a large income stream, don’t want to take on new debt, and those who don’t mind sharing the potential future appreciation of their home.
Ultimately, HEIs can provide valuable flexibility for the right homeowner, but it’s important to weigh the long-term trade-offs, especially if you’re considering redirecting your home equity toward other assets in your investment portfolio. Also, don’t forget to compare them against more traditional financing options before committing.
References:
- Are Home Equity Investments Good for Homeowners? | Bankrate
- Understanding Home Equity Agreements: A Comprehensive Guide
