Using A Home Equity Agreement (HEA Loan) to Cash Out Home Equity: Bad Move or Savvy Play?

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A home equity agreement, or HEA loan, is a little-known way to tap into home equity without the high interest rates and qualifying headaches of a regular home equity loan. Sounds intriguing, right? But is it legitimate? We’ll cover how it works and a few potential pitfalls to watch out for.

What is a Home Equity Agreement (HEA Loan)?

If you’ve checked into a home equity loan lately, you probably already know that interest rates have increased a lot. And, of course, higher rates means higher monthly payments on home equity loans.

These days, a home equity loan can cost $250 to $300 per month to borrow a mere $25,000. If you borrow $100,000, it could cost $1,000 to $1,200 or more per month. That’s awfully big payment for that size of loan.

And if you happen to have bruised credit, limited income, or difficulty proving your income, it could be tough to qualify for a home equity loan.

Fortunately, a regular home equity loan from a regular bank is no longer the only game in town. There is a new option available that has worked well for many homeowners: the home equity agreement.

A home equity agreement (also called a home equity sharing agreement or HEA loan) enables you to convert home equity into cash without the high interest rates, payments, and qualifying headaches of a regular home equity loan.

How an HEA Loan Works

So, how does a home equity agreement work? They can be structured in various ways, but here’s a rundown of how they generally work:

  • Cash lump sum – You receive a large lump sum of cash based on the equity in your home. Payouts can be anywhere from $30,000 to $500,000.
  • No monthly payments and no interest – Unlike a home equity loan or HELOC, no monthly payments are required and no interest is charged on your payout.
  • You remain the owner of your home – You remain the owner of your home, which means you’ll continue to pay your property taxes, homeowner’s insurance, and any existing mortgage payments and HOA dues (if applicable).
  • No minimum income requirements – Because there are no monthly payments, there are no minimum income requirements. It’s possible to qualify even with zero income.
  • Qualify with bad credit – You don’t need perfect credit to qualify. Minimum credit scores are usually around 500.
  • Keep your existing mortgage – You don’t have to refinance or pay off your existing mortgage.

In exchange for a lump sum payout, you agree to repay the investor a percentage of the value of your home at a future date, such as when you sell your home, the last borrower passes away, or the contract term (usually ten years or longer) ends.

Home equity agreements are not available in all states and not everybody qualifies. If you would like to check your eligibility, we recommend starting with Unlock, a leading provider rated “Excellent” on Trustpilot. Click the button below to check your eligibility now.

A home equity agreement is also commonly referred to as a shared equity agreement, equity sharing agreement, home equity sharing agreement, shared equity finance agreement, or shared equity mortgage. People use a variety of terms to refer to generally the same thing: an agreement that converts home equity into cash without the high interest rates, payments, and qualifying headaches of a regular loan.

Qualifying Requirements

HEA loans vary from one provider to the next, but here are some common requirements:

  • Homeownership – You need to own a home and have significant equity in your home. How much home equity you need may vary depending on the company you’re working with.
  • Occupancy – Primary residences, second homes, and rentals are eligible.
  • Home condition – Your home doesn’t need to be perfect, but it needs to be in at least reasonably good condition.
  • Credit scores – Minimum 500 credit score with income verification. Minimum 550 credit score without income verification.
  • Derogatory credit – No bankruptcies, short sales, or foreclosures in the last three to five years. Investor guidelines regarding derogatory credit will likely vary.
  • Late payments – No 90-day late payments on any mortgage in the past two years. No 120-day late payments on any mortgage in the last three years.
  • Debt-to-income – Maximum debt-to-income ratio of 45%. You may be able to pay off debt to qualify.

Again, this is just a general rundown of the potential requirements you may encounter. Requirements will vary from one investor to the next and additional requirements may apply.

How Homeowners Use The Money

A home equity sharing agreement is a good option because it enables you to convert home equity into cash without adding yet another payment to the monthly budget. Homeowners commonly use the funds to:

  • Consolidate debt & reduce monthly expenses – Wiping out high interest and high payment credit card balances, personal loans, and auto loans can free up hundreds or even thousands of dollars per month.
  • Improve credit scores – High credit card balances can damage your credit scores even if you make your payments on time. Paying off credit card debt can significantly improve your credit scores.
  • Pay off medical, dental, and vet bills – Many homeowners use an HEA loan to clear up medical, dental, and vet bills.
  • Fund home repairs and improvements – Need to replace the roof or furnace? Homeowners commonly use an HEA loan to do home improvements and repairs.
  • Rainy day or emergency fund – The cost of living rising has been rising fast, so it’s critical to have cash laying around for unexpected expenses.
  • Invest in your business – Small business loans can be difficult and tedious to get. An HEA loan can be a great funding source to start a new business or grow an existing one.
  • College tuition and expenses – It’s no secret that college is super expensive these days. You can use home equity to pay for college and avoid the financial risks and headaches of student loans.

Who is a Home Equity Agreement Good For?

Home equity agreements work great for many homeowners, but they’re not always the perfect solution. In my opinion, you may be a good equity sharing candidate if:

  1. You want to avoid a monthly payment – Home equity loans always have monthly payments. The HEA loan could be a good option if you prefer not to add another payment to the budget.
  2. You want to eliminate debt payments – A home equity loan consolidates and reduces debt payments, but an HEA loan eliminates them altogether.
  3. You have limited income or can’t prove your income – It’s tough to get a home equity loan if you have limited income or can’t prove your income. The HEA has no minimum income requirements and you typically don’t need to prove income if your credit scores are at least 550.
  4. You have damaged credit – You need good credit to get a home equity loan. If you have damaged credit, an HEA loan will be a more workable solution.
  5. You’re too young for a reverse mortgage or a reverse mortgage doesn’t otherwise work or make sense.
  6. You plan to sell your home in the next few years. Remember, an HEA loan has a contract term. If you don’t sell your home within the contract term, you may need to buy out the investor with cash, a new mortgage, or some combination of both.

If you decide to check into a home equity sharing agreement, make sure you thoroughly understand the terms before you sign the final agreement. Equity sharing is legitimate, but it’s different than what most people are used to.

If you’d like some additional explanation about how an equity sharing agreement works, check out the video below from a YouTuber who helped a client get one.

HEA vs HELOC and Other Options

Equity sharing can be a good alternative to the usual mortgage options, such as home equity lines of credit (HELOC), home equity loans, cash out refinances or reverse mortgages.

These are legit options, but they don’t work for many homeowners because of high interest rates, large monthly payments, strict credit and income requirements, or age restrictions. Here are some of the other options you may also be considering:

  • Home equity line of credit (HELOC) – HELOCs enable you to borrow against your home equity at your convenience on a revolving basis. Interest rates are variable, which means your payment can increase if rates rise. Your payment is initially interest-only, but is re-amortized at the end of ten years into a full principal and interest payment, which can double or triple your payment. You’ll need good credit and income to qualify for a HELOC. The advantage of the HEA vs HELOC is that the HEA loan doesn’t have a payment or an interest rate that can increase over time.
  • Cash out refinance – If you have an existing mortgage, you may be able to refinance it and take out additional equity. You’ll need good income and at least fair credit (credit score of 620 or better) to qualify, but it’s best to have good or excellent credit to keep the rate and closing costs reasonable.
  • Home equity loan – A home equity loan enables you to borrow a lump sum and repay it over 10 to 15 years. Most home equity loans have fixed interest rates, but the rates are usually higher than HELOC and cash out refinance rates. The payments also tend to be higher because the loan terms are shorter. You’ll need to have at least decent credit and income to qualify.
  • HECM reverse mortgage – If you’re over 62, a HECM reverse mortgage offers access to home equity without a mortgage payment and without giving up ownership of your home. There is no minimum credit score required and you don’t need a lot of income to qualify. You can take the proceeds as a lump sum, line of credit, monthly term/tenure income, or some combination of all of these options. The reverse mortgage is a great product, but the closing costs can be steep, interest accrues on the loan balance, and you have to be old enough to qualify.

A home equity sharing agreement is an attractive option because it enables you to avoid the high interest rates, large payments, and qualifying headaches of traditional home equity solutions.

Many homeowners considering an HEA often look at a HELOC as well. The advantage of the HEA vs HELOC is that the HEA doesn’t have a payment or an interest rate that can increase over time. The HEA loan also has less stringent qualifying requirements than a HELOC.

Home Equity Agreement Pros and Cons

We’ve covered a lot of information, so let’s summarize everything with a list of home equity agreement pros and cons. Here are the potential upsides:

  • No monthly payments – If you’re paying off other debt, this can save you a huge amount of money every month. Or, you can pay for home improvements, fund college tuition and expenses, or invest in a business without adding additional debt payments to your budget.
  • Larger payouts than a home equity loan – Because there’s no payment, you’re not subject to the debt-to-income ratio limitations that often apply to a traditional loan. You may be able to get more cash from a home equity agreement than you can get from a regular home equity loan. Again, payouts are up to $500,000 with zero monthly payments.
  • No rate worries – HELOCs usually come with variable rates, which means your payment increases as interest rates rise. A home equity agreement doesn’t have a payment or interest rate, so there is no need to worry about interest rates.
  • Easier to qualify for – You can qualify even if your credit isn’t perfect or if you have limited income, zero income, or can’t prove your income (such as if you’re self-employed).
  • No limits on how you use the funds – You can use the money for whatever you need.
  • Keep your existing mortgage – A home equity agreement gives you access to home equity without sacrificing the low rate you have on your mortgage.

Here are some potential downsides:

  • The contract term – Remember, the investor wants to get repaid at the end of the contract term. If you don’t sell your home, you’ll need to pay off the HEA loan with cash and/or another loan. The contract term usually lasts ten years or more, so at least you have a large time window to work with.
  • Closing costs – An HEA loan typically comes with at least some closing costs, including origination, title, escrow, recording, appraisal, credit report, etc. Of course, keep in mind that many regular home equity loans have closing costs as well.
  • Additional fees at buy out – You may have to pay additional title, reconveyance, escrow, appraisal, and administration fees when the HEA loan company processes the final buyout. Make sure to ask about these before you close.
  • Maintenance adjustment – It’s important to continue maintaining your home. This is a normal requirement of all home loans (including the one you may already have). If you allow your home to drastically deteriorate, the HEA loan company may assess a “maintenance adjustment” on your home’s value at the end of the contract term. In other words, they may increase the final value to what the home should be worth had it been maintained, then figure their buy out based on that number.
  • Difficulty getting a regular mortgage – Equity sharing is relatively new and few mortgage lenders understand it works. You may find it difficult or impossible to get a regular mortgage without first paying off your home equity agreement.
  • Unfamiliar terms – Again, equity sharing is relatively new, which means many homeowners are unfamiliar with how it works. Even if you’re working with a reputable company who thoroughly discloses and explains everything, it can be easy to overlook important considerations that can impact you in the future.

As you can see, home equity agreements can be a beneficial way to tap into home equity to consolidate debt, pay medical bills, do home improvements, or make a large purchase. 

Having said that, it’s important to look at the whole picture and make sure it’s a good fit for your individual circumstances. Make sure you understand the terms and potential downsides thoroughly before you sign the final agreement. You may want to enlist a trusted advisor to review the terms as well.

Remember, even though there’s no payment or interest, it’s not without cost . You’re just deferring the cost to a future date.

Home Equity Agreement Calculator

Where to Find An HEA Provider

The HEA industry is relatively small. You may have to dig a little to find a good home equity sharing company that operates in your state. We recommend checking the latest reviews on Trustpilot, the BBB, and Google Reviews as you investigate potential companies to work with.

If you would like to check your eligibility now, we recommend starting with Unlock, a leading provider rated “Excellent” on Trustpilot.

Frequently Asked Questions

What is the meaning of HEA?

HEA stands for home equity agreement, which is a unique and little-known way of tapping your home’s equity without giving up ownership of your home or taking on a mortgage payment. Many homeowners use such agreements to consolidate debt, make home improvements, or supplement income and assets.

What is an HEA and how does it work?

HEA stands for home equity agreement. A home equity agreement is a unique way to tap into your home’s equity without taking on a monthly payment or selling your home, even if you don’t have perfect credit. You may also hear home equity agreements referred to as a home equity investment, home equity sharing agreement, shared equity loan, or shared equity agreement. We cover some important pros and cons on this page that you should be aware of before signing up for a home equity agreement.

What is the point of the HEA?

The purpose of a home equity agreement, or HEA loan, is to unlock home equity without giving up ownership of your home, taking on a mortgage payment, or paying mortgage interest. Many homeowners use home equity agreements to consolidate debt, make home improvements, or supplement income and assets.

How much do you get with an HEA?

Depending on your credit situation, home value, and existing mortgage balances, HEA companies tend to offer 10% to 30% of your home’s value in cash. No mortgage payments are required and no interest is charged on the money.

Are HEA loans good?

An HEA loan is a legitimate way to convert home equity into cash, but whether it’s good for you depends on your goals and qualifications. The advantage of an HEA loan is that there are no monthly payments or interest charges to worry about. It’s also typically easier to qualify for an HEA than a traditional home equity loan or HELOC. You don’t need perfect credit and you often don’t need to prove income.

What is an HEA?

HEA stands for home equity agreement, which is a unique and little-known way of tapping your home’s equity with no monthly payment or interest charges. Many homeowners use a home equity share agreement to consolidate debt, make home improvements, or supplement income and assets without adding a monthly payment to your budget. You may also hear home equity agreements referred to as home equity investments, home equity sharing agreements, or shared equity agreements. We cover some important pros and cons on this page that you should be aware of before signing up for a home equity agreement.

Is an HEA better than a HELOC?

Yes, it can be! HELOCs typically have variable rates, which means your payment can increase significantly if rates increase. An HEA has no monthly payment at all, so you can use it to eliminate credit card, auto loan, student loan, or other consumer loan payments. Or, you can use it to do home improvements without adding a monthly payment to the budget.

Is a home equity agreement a good idea?

It depends on what you’re hoping to accomplish. The advantage of a home equity agreement is that you can convert home equity into cash without the payment headaches and high interest rates of a home equity loan. Many homeowners use home equity agreements to consolidate debt, make home improvements, or supplement income and assets. We offer more information about potential home equity agreement pros and cons on this page.

What is a shared equity agreement?

A shared equity financing agreement is a unique and little known way to convert home equity into cash with zero monthly payments and interest charges. The equity share agreement is paid back at the end of the contract term based on a percentage of your property value or the amount of equity you have in your home. Shared equity agreements are also commonly called home equity agreements.

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About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.