Home Equity Agreement vs. HELOC: Which Option Makes More Sense?

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Key Takeaways

• Home equity agreements provide a lump sum in exchange for a share of your home’s future value, with no monthly payments; HELOCs require monthly payments and usually come with variable interest rates.

• According to Hometap’s calculator, giving up a 10% stake in a $400,000 home would cost $155,443 at settlement after 10 years of 8% annual appreciation.

• Some home equity sharing firms accept credit scores as low as 500, while most HELOC lenders generally require scores between 620 and 680.

How are a home equity agreement and a HELOC different?

A home equity agreement means selling part of your home’s future value to an investor in return for cash upfront. A HELOC, by contrast, functions more like a credit card, allowing you to borrow against your equity over time.

Home equity agreements do not involve monthly payments or interest charges. HELOCs do, although the amount you owe depends on how much you draw.

Qualification can also be easier with a home equity agreement. Some home equity investment companies will consider borrowers with credit scores as low as 500, while most HELOC lenders look for minimum scores in the 620 to 680 range.

How a home equity agreement works

With a home equity agreement, you trade a portion of your home’s future value for a lump-sum payout. There are no required monthly payments, but the agreement must be settled by a set date, typically within 10 to 30 years depending on the provider.

When settlement comes due, you owe the investor an agreed-upon share of your home’s value at that time. If your home has risen sharply in value, the amount due can be far higher than the cash you received initially.

These agreements often include an upfront service charge and other closing-related costs such as appraisals and notarization. Those expenses are usually taken out of the original payout.

How a HELOC works

A HELOC turns part of your home equity into a revolving credit line. During the draw period, which usually lasts 10 years, you can borrow money as needed.

In most cases, you pay only interest on the amount you’ve used during the draw period. After that ends, you begin repaying both principal and interest over the remaining term, which is often another 20 years.

One advantage of a HELOC is flexibility: you can borrow, repay, and borrow again up to your credit limit. That limit is usually set at 80% to 90% of your home’s current value, minus any mortgage balance you still owe.

Which costs more on a $400,000 home?

There is no exact apples-to-apples comparison between a home equity agreement and a HELOC because many variables affect the final cost. With a home equity agreement, the total depends on the investor and the share of equity you give up. The examples below are for illustration only.

Home equity agreement

Suppose you sell a 10% stake in your $400,000 home to Hometap, which caps its return at the equivalent of an 18.5% annual interest rate. In this example, you would owe 18% of your home’s value if you settled after a 10-year agreement. Here is what that could look like if your home value falls by 4% or 8% a year, stays flat, or rises by 3.25% or 8% annually by the end of the term.

Home equity sharing agreement sample repayment

HELOC

A HELOC can cost quite a bit depending on how much you borrow and what rate you get. Most HELOCs use variable rates that can move over time, so your monthly payment and overall cost can change as well. Some lenders do offer fixed-rate options.

To illustrate how costs can add up, consider a hypothetical fixed-rate example.

Say you take out a $40,000 fixed-rate HELOC at 8.25% with a 10-year draw period and a 20-year repayment period. If you borrowed the full amount right away, you would pay about $114,800 over 30 years, including roughly $74,800 in interest.

HELOC repayment example

Variable-rate HELOCs are structured differently. Lenders usually start with the prime rate and add a margin to determine your initial rate. If the prime rate increases, your HELOC rate likely will too, making long-term cost estimates harder to pin down.

How do they compare with a home equity loan and a reverse mortgage?

Home equity loans and reverse mortgages are other ways to convert home equity into cash. With a home equity loan, you receive a lump sum based on part of your equity and repay it in monthly installments, plus interest, over a term that typically ranges from 5 to 30 years.

Reverse mortgages are available only to homeowners age 62 and older for government-backed versions, or age 55 and older for some private products. True to the name, they work in reverse: instead of paying the lender, the lender pays you from your home equity. Payouts can come as monthly income, a lump sum, or a line of credit. Repayment happens when you move out permanently, sell the home, or die.

Which option suits you?

The better choice depends on your needs and goals.

Choose a HELOC if … you are unsure how much you need to borrow or want ongoing access to funds, you are comfortable making monthly payments, and you can handle the uncertainty of a variable rate.

Choose a home equity agreement if … you want a lump sum but cannot manage monthly payments. Just be prepared for the potentially large amount due when the agreement ends.

Home equity sharing vs. HELOC FAQs

What are the drawbacks of home equity agreements?

Home equity agreements can end up costing far more than the amount borrowed if your home rises sharply in value before settlement. They may also include steep upfront fees.

Is an HEA better than a HELOC?

A home equity agreement may be a better fit than a HELOC if you need a lump sum and cannot afford monthly payments. A HELOC may be better if you want flexibility, ongoing access to funds, and can handle regular payments.

Is a home equity agreement worth it?

A home equity agreement may be worthwhile if you want access to your home equity without taking on monthly payments. Just make sure you can handle the potentially large lump-sum payment due at settlement.

Use your home equity to finance your goals with Rocket Mortgage (NMLS #3030)