Home Equity Investments: Read the Risks First

The short answer

A home equity investment (HEI) gives you cash now in exchange for a share of your home's value later. You may also hear it called a home equity agreement, home equity contract, or home equity sharing agreement.

Here's the part that gets attention: you usually don't make monthly payments.

Here's the part that matters just as much:

• You still have to pay it back. You pay it all at once, later, usually when you sell, refinance, or reach the end of the deal.
• You might pay back a lot more than you got. The amount depends on what your home is worth later and the math in your contract.
• Your home is on the line. The company usually puts a lien on your home. A lien is a legal claim that says the company gets paid from your home. If you can't pay when it's due, you may have to sell. In some cases, you could face foreclosure, which means the company can force a sale to get its money.

The money isn't free. You're trading part of your home's future value for cash today.

Before you decide, compare an HEI with a home equity loan and a cash-out refinance. If you're 62 or older, compare it with a reverse mortgage too.

The risks first

"No monthly payment" sounds simple. The risks are not.

1. You could lose your home

The company usually holds a lien on your home. When the deal ends, you owe one big payment. If you can't pay it and you can't refinance, you may have to sell. If you break the contract, the company may be able to foreclose.

2. You could pay back much more than you got

Getting $50,000 doesn't mean paying back $50,000. You might pay back $80,000, $100,000, or more. If your home's value goes up a lot, the deal can get very expensive.

3. Even if your home's value doesn't go up, you can still owe more

This surprises a lot of people.

Many companies don't start with your home's real appraised value. They start with a lower number. Say your home is worth $400,000 and the company starts at $340,000. On paper, your home has already "gone up" $60,000, and the company gets a share of that.

So you can owe more than you got even if your home's value never changes.

4. It's one big bill instead of many small ones

No monthly payment doesn't mean no payment. It just means you pay later, all at once.

When that day comes, you'll need to pay with:

• Savings
• A new loan
• Money from selling your home

"I'll just refinance later" shouldn't be your only plan. Nobody knows what interest rates, your income, or your credit will look like 10 years from now.

5. Breaking the rules can make it due early

While the deal is open, you usually have to:

• Keep paying your mortgage
• Pay your property taxes
• Keep homeowners insurance
• Take care of the house
• Get permission before adding other loans on the home or changing who owns it

If you slip on any of these, the company may be able to make you pay everything right away, even if the timing is bad for you.

6. If you die, your family may have to pay it off

Many contracts make the deal come due when the homeowner dies. Your family may have only a short time to pay. If they can't, they may have to sell the house.

If you want your kids or family to keep the house, find out exactly what happens and how much time they'd have.

A simple example

This is a made-up example to show how the math works. It's not a real offer. Real contracts use different formulas, fees, and limits.

• Your home is worth: $400,000
• You get: $50,000
• The company gets: 20% of what your home is worth when you pay it off

*Illustrative annualized cost is the yearly rate that would turn the $50,000 you got into the payoff amount over that many years. It's only here to help you compare the examples. It's not an interest rate or APR, and it leaves out fees, taxes, caps, and other contract terms.

Look at the first row. You got $50,000. Three years later, you'd owe about $92,600.

So don't just ask, "How much can I get?"

Also ask, "How much will it cost me to get out?"

Worst-case scenarios

Most ads only show what happens when everything goes right. Here's what can happen when it doesn't. These use the same made-up deal: $400,000 home, $50,000 cash, and the company gets 20%.

Your home's value shoots up

Your home's value grows 7% a year for 10 years. It's now worth about $787,000. The company's 20% is about $157,000. That's more than three times what you got, an illustrative annualized cost of about 12%.

Ask: Is there a cap on how much I could owe?

You have to pay it off early

You move after 2 years because of a new job, a divorce, or a family need. Your home's value grew 6% a year and is now worth about $449,000. You owe about $90,000 on the $50,000 you got. That's an illustrative annualized cost of about 34%.

Paying off early can have a very high annualized cost because you had the money for only a short time. Some contracts also have a minimum payoff or other terms that affect what you owe if you pay early.

Ask: Is there a minimum payoff? What would I owe after 3, 5, and 10 years?

The deal ends and you don't have the money

After 10 years with 4% growth a year, you owe about $118,000, all at once.

If you don't have it, you can:

• Get a new loan, if you can qualify at that time
• Sell your home, even if you weren't planning to move
• Fall behind, which could lead to foreclosure

Ask: What happens if I can't pay when the deal ends? Can I get more time?

Your home's value drops, and you owe more than it's worth

Home values in your area fall 25%. Your home is now worth $300,000. The company's share drops to $60,000, but you still owe more than you got.

Now add everything up:

To keep the math simple, this example assumes selling costs of 6% of the sale price. Real selling costs vary.

Ask: Do you share in losses if my home's value drops? Is there a minimum I'd owe?

Your home improvements raise what you owe

You spend $60,000 adding a bathroom. It raises your home's value by $70,000. If your contract doesn't give you credit for improvements, the company gets 20% of that increase, or $14,000, even though you paid for all of it.

Ask: How do you handle home improvements? What records do I need to keep?

If you plan to improve your home, save every receipt, invoice, permit, and before-and-after photo.

How an HEI works

Now that you know the risks, here's how the process usually goes.

1. Check if you qualify. The company looks at your home's value, what you still owe on your mortgage, how much equity you have, and where your home is. Rules can be looser than for a regular loan. That doesn't mean the deal is less risky.

2. Get an offer. The company tells you how much cash you can get and how it will figure out what you owe later. Slow down here. Don't just look at the cash amount.

3. Your home is valued. The company may send an appraiser or use a computer estimate. Compare your home's real value with the starting value in the contract. They may not be the same.

4. Sign and get your money. The company puts a lien on your home, and you get the cash.

5. Pay it off later. You pay off the deal when you sell, refinance, buy the company out, reach the end of the deal, or when something in the contract makes it come due.

What to check in any offer

Every company does it a little differently. Before you sign, find out:

• Cash you actually get: How much is left after fees?
• Real value vs. starting value: What's your home worth, and what number does the contract use?
• The company's share: How much of your home's future value do they get?
• The math: Exactly how is the payoff figured out?
• Fees: What do you pay now, and what do you pay later?
• Cap: Is there a limit on how much you could owe?
• If value drops: Do they share the loss, or is there a minimum?
• Improvements: Do you get credit for work you pay for?
• Length: When does the deal end?
• Paying off early: Is there a waiting period? Does the math change?
• Default: What counts as breaking the contract?

Ask for written examples showing what you'd owe if your home's value goes up 10%, 25%, and 50%, stays the same, or goes down. Ask for dollar amounts, not just percentages.

Don't take a phone call or a sales pitch as the final word. Read the actual contract.

Now, the good parts

For the right person, an HEI can make sense. Here's why people choose one.

No monthly payment. You get cash without adding another bill each month. That can help if your budget is tight month to month. But no monthly payment doesn't mean no cost.

You keep your current mortgage. A cash-out refinance replaces your whole mortgage. If you have a low rate you don't want to lose, an HEI leaves it alone.

It can be easier to qualify. Companies may look at things differently than banks do. That can help some people. But if money is already tight, be extra careful. Being turned down for a loan doesn't make an HEI affordable.

You can get a large amount. If you have a lot of equity, an HEI can pay for big things like a new roof, a new HVAC system, or a major repair.

A word about credit cards: Your credit card debt isn't tied to your home. If you use an HEI to pay it off, your home becomes part of the deal. Think carefully about that trade.

When an HEI may be worth comparing

An HEI may be worth a closer look if you:

• Have a lot of equity in your home
• Need a large amount of cash
• Really want to avoid another monthly payment
• Want to keep your current mortgage
• Plan to stay in your home for many years
• Understand exactly how the payoff is figured out
• Know how you'll pay it off when it ends
• Have already compared a home equity loan

When you should look closely at other options

Take a hard look at other choices first if you:

• Might move in the next few years
• Could get a home equity loan at a good rate and afford the payments
• Don't have a plan to pay it off when it ends
• Want your family to inherit the house with no strings attached
• Would be using the money to cover everyday bills you can't keep up with

How HEIs compare

All of these turn your home's equity into cash, but they work very differently.

State rules differ. Some states treat home equity agreements like mortgage loans and have extra rules to protect you. Check the rules where you live.

HEI vs. cash-out refinance

A cash-out refinance replaces your mortgage with a bigger one and gives you the difference in cash. If your current rate is low, you'd give it up on your whole balance just to get a smaller amount of cash.

An HEI keeps your mortgage the same, but you take on the HEI's risks instead. You're trading one set of pros and cons for another.

If you're 62 or older: look at reverse mortgages too

A reverse mortgage (the most common kind is called a HECM) is a loan insured by the federal government for homeowners 62 and older. Like an HEI, you usually don't make monthly payments. Unlike an HEI, it's a loan. Interest and fees add up over time, and the amount you owe grows.

You still have to pay property taxes and insurance and take care of the home. It has its own costs and risks. But if you're 62+ and want cash without a monthly payment, compare it too.

Compare your options

Home Equity Investment

Cash now, no monthly payment. The catch: You pay back one big amount later, and it may grow with your home's value.

Home Equity Loan

One lump sum, usually with a rate that stays the same. The catch: Adds a monthly payment tied to your home.

Compare home equity loans

Cash-Out Refinance

A new, bigger mortgage that gives you cash. The catch: It changes the rate on your whole mortgage.

Compare cash-out refinance

Reverse Mortgage (62+)

A loan for older homeowners with no monthly payments. The catch: What you owe grows over time and must be paid back later.

Before you sign: 10 questions to ask

1. How much money will I actually get after all fees?
2. What starting value are you using, and how does it compare to the appraisal?
3. Exactly how do you figure out what I'll owe?
4. What would I owe if my home's value goes up 10%, 25%, or 50%, stays the same, or goes down?
5. What would I owe after 3, 5, and 10 years, and at the end of the deal?
6. Is there a limit on how much I could owe?
7. What could make the deal come due early?
8. How do you handle home improvements?
9. What happens if I die before it's paid off?
10. What happens if the deal ends and I can't pay?

If the answers aren't clear, walk away or get help. Don't let "no monthly payment" rush you.

How to protect yourself

• Get examples in writing. Ask for the good, the flat, and the bad.
• Plan your exit before you sign. Don't wait until year 9.
• Know the cap, the minimum, and the fees.
• Stay current on your obligations. Make sure your mortgage, property taxes, homeowners insurance, and other required home costs stay paid.
• Tell your family. Let them know the deal exists and where the papers are.
• Get advice. Talk to a financial advisor, a lawyer, or a tax professional before you sign.

Look at how you get out, not just how you get in

Getting $50,000 today is easy to understand. The harder question is: what happens when it's time to pay it back?

Before you sign, make sure you know:

• What you get today
• What you could owe later
• What could make it come due early
• What happens if you can't pay
• What your family would face
• What your other options would cost

Look at both sides. Then decide.

AssistQuote helps you compare options before you decide whether to talk to a company. Your information isn't sent to any company unless you choose to move forward with that company.

Compare home equity options

Frequently asked questions

Is a home equity investment a loan?

It isn't set up like a regular loan. But some states treat these deals like mortgage loans and have rules for them. Check your contract and your state's rules.

Can I lose my home with an HEI?

Yes, it's possible. The company usually has a lien on your home. If the deal comes due and you can't pay, you may have to sell or refinance. If you break the contract, the company may be able to foreclose.

Do I make monthly payments?

Usually not on the HEI itself. But you still have to pay your mortgage, property taxes, and insurance and take care of your home.

What happens when an HEI ends?

You pay it off, usually all at once. You can use savings, a new loan, or money from selling your home.

Can an HEI cost a lot even if my home's value doesn't go up?

Yes. Many contracts start with a lower value than your home is really worth, or add fees and other terms. You can owe more than you got even if your home's value stays the same.

What if my home's value goes down?

It depends on the contract. Some companies share the loss. Others have a minimum you must pay. Don't assume you'll owe less just because your home is worth less.

Can I pay it off early?

Usually yes. But because you had the money for a shorter time, paying early can have a high annualized cost. Some contracts also have a minimum payoff. Ask for examples at 3, 5, and 10 years.

What happens if I die?

Many contracts make the deal come due. Your family may need to pay it off or sell the home. Ask how much time they'd have.

Important information

Home equity investments involve your home and can change how much of its value you keep. Terms, fees, how your home is valued, how the payoff is figured out, limits, and your responsibilities are different for each company and each state. Some states treat these agreements like mortgage loans.

Read the whole contract before you sign. Talk to a financial advisor, lawyer, or tax professional about how it could affect your money, your home, your taxes, and your family.

AssistQuote gives you information to help you compare options. We don't give legal, tax, or personal financial advice.

Sources

• Consumer Financial Protection Bureau: Issue Spotlight: Home Equity Contracts: Market Overview
• Consumer Financial Protection Bureau: Reverse mortgages