Is a home equity sharing agreement a good idea? Here's what experts say

Thanks to continued high inflation, the Federal Reserve has been keeping interest rates high for some time. This has led to higher rates on virtually all financial products — and on credit cards in particular, which now have average rates above 21%.

Unsurprisingly, this has led consumers to seek out other products when in need of cash. For homeowners, this has often meant home equity loans and home equity lines of credit (HELOCs), as these borrowing options tend to have much lower rates than credit cards and personal loans in today's high-rate environment. 

But a third option has emerged that comes with no interest at all: the home equity sharing agreement. These allow you to sell off a portion of your home's future equity for a lump sum of cash. There is no interest tied to this type of agreement, and you make no monthly payments in return for the money. Instead, you repay it when you sell the home or the term runs out. Should you consider a home equity sharing agreement, though? 

Find out what your best home equity tapping options are online now.

Is a home equity sharing agreement a good idea? Here's what experts say

Here's what experts have to say about when a home equity sharing agreement may or may not be a good idea.

Yes, if you don't want to take on debt or monthly payments

If you need cash but don't have the money to make extra payments — or pay interest — home equity sharing could be a smart option to explore. 

"It's not a loan product," says Michael Micheletti, chief communications officer at Unlock Technologies, a home equity sharing company. "A home equity loan and home equity line of credit are."

Home equity sharing may also be wise if you don't want extra debt reflected on your credit profile. 

"These agreements allow homeowners to access their home equity without incurring additional debt," says Michael Crute, a real estate agent and operations strategist with Keller Williams in Atlanta. "This can be particularly useful for those who want to use the funds for investments, renovations, or other significant expenses without increasing their debt-to-income ratio."

Learn more about the home equity loan and HELOC rates you could qualify for here.

Yes, if you're worried you won't qualify for a loan

If you don't think your credit score, income or other financial details will qualify you for a home equity loan, a home equity sharing agreement can be a viable alternative. According to Micheletti, home equity sharing options have "lower qualification thresholds" than loan products.

"Income requirements are flexible, and agreements are available to retirees and others who may not have a consistent or high income," Micheletti says. "Credit score requirements are lower, too. Scores in the 500s may qualify."

This is in stark contrast to home equity loans and HELOCs, which usually require credit scores well into the 600s.

"The homeowners who need this product are those who don't have the alternative of collateralized options like home equity loans or home equity lines of credit," says David Shapiro, CEO and founder of EquiFi, a home equity sharing company. "Most of the business being funded today is for homeowners with credit scores between 500 to 680."

No, if you want big proceeds when you sell

If you're hoping to cash in on your home's value and get a big payday once you sell, a home equity sharing agreement might not be for you.

"While there are no monthly payments, the effective cost of capital can be high," Crute says. "The homeowner essentially sells a portion of future appreciation, which might turn out to be costly if property values rise significantly."

Let's say the investor appraises your home at $400,000 and you sell 15% of your future equity, getting $50,000 in return. Once you sell (or your payoff date rolls around), you'll owe the investor $50,000 plus 15% of any appreciation in your home's value. If your home sells at $500,000, for instance, you'd owe $50,000 + $15,000 (500,000 x .15) for a total of $65,000. 

No, if you're not sure how much you need

Home equity sharing agreements give you a lump sum payment, so you'll want to have a rough idea of how much cash you need before taking one out. If you're not sure what you need, a HELOC may be a better fit, as these let you borrow money incrementally over time, much like a credit card.

"A HELOC can make sense if a homeowner doesn't know how much — or when — they'll need the funds," Micheletti says. 

HELOCs can also be helpful if you need extended access to a line of credit. Most let you borrow from your line of credit (up to the credit limit) for at least 10 years.

"Many homeowners do home improvements over time like HELOCs, as they only pay interest on the amounts they use," says Chad Smith, president of online mortgage lender Better.com. "With HELOCs, you don't share any appreciation with the lender."

No, if you want to refinance later on

Finally, home equity sharing might not be wise if you plan to refinance later on. With these agreements, the investor may put a lien against your property until the debt is repaid. And, your lender may not let you refinance with one of these in place.

"If you need additional liquidity or want to refinance your first lien mortgage, there could be restrictions," Smith says. "Having a lien might impact your ability to secure other things such as home improvement loans, solar financing, or additional home equity loans."

The terms of home equity sharing agreements vary by investment company, so make sure you understand the terms and fine print before moving forward with one. 

"Home equity sharing agreements are often complex legal documents and it's important for homeowners to fully understand the terms, including how and when the agreement can be terminated, the conditions under which the equity partner can claim their share, the impacts on your ownership rights, implications related to your loan, and any fees or penalties involved," Crute says.

You should also research the home equity sharing company thoroughly.

"Unlike HELOCs and home loans, which are offered by federally regulated entities, many home equity sharing agreements are funded or financed by private investors, institutional investors, and specialized financial companies," Crute says. "These entities are often subject to less stringent regulations."

The bottom line

There are certain cases in which a home equity sharing agreement could be a good alternative to traditional home equity tapping options, but that won't be true in every case. If you're considering a home equity sharing agreement (or any other home equity products), it may benefit you to talk to a financial or mortgage professional. That way, they can make recommendations based on your personal situation.