Home Equity Investments: A Consumer Guide

Accessing Your Home Equity Without a Monthly Payment — What You Should Know Before You Decide

Your home may be one of your largest financial assets. But having substantial equity in your home doesn't necessarily mean that equity is easy to access.

Traditionally, accessing home equity has meant borrowing against your property through a home equity line of credit (HELOC), home equity loan, cash-out refinance, or another mortgage product.

A Home Equity Investment (HEI), also commonly referred to as a Shared Equity Agreement (SEA) or Home Equity Agreement (HEA), provides a very different option.

Instead of borrowing money and making monthly principal and interest payments, an HEI allows you to receive cash from an investor today in exchange for giving the investor an agreed-upon percentage of your home's future change in value.

There are no required monthly payments and no traditional interest charges under the HEI structure discussed in this guide. Depending on the specific investor and program requirements, the agreement may remain in place for as long as 30 years.

That can make an HEI particularly interesting for homeowners who have significant equity but don't want—or may not qualify for—another monthly loan payment.

However, an HEI is not free money.

The investor expects a return on its investment, and depending upon how much your home appreciates and how long you keep the agreement, that return can become substantial.

The purpose of this guide is to help you understand both sides before you decide.

What You’ll Learn in This Guide

1. What Is a Home Equity Investment?
2. How Does an HEI Work?
3. How Much Money Can I Receive?
4. What Credit Score Do I Need?
5. Do I Have to Qualify Based on Income?
6. How Much Equity Do I Need?
7. What Properties May Qualify?
8. What Can I Use the Money For?
9. How Is the Investor’s Percentage Determined?
10. Understanding the 5% Starting-Value Adjustment
11. What Happens if My Home Goes Up in Value?
12. What Happens if My Home Goes Down in Value?
13. Do I Still Benefit from Paying Down My Mortgage?
14. What Happens if I Remodel My Home?
15. What Happens if I Don’t Maintain My Home?
16. Can I Sell My Home Whenever I Want?
17. Can I Pay Off the HEI Early?
18. Can I Refinance My Mortgage Later?
19. Can I Get Another HELOC or Second Mortgage Later?
20. What Fees and Closing Costs Should I Expect?
21. How Long Can I Keep an HEI?
22. What Happens if I Die Before the Agreement Ends?
23. HEI vs. HELOC vs. Home Equity Loan
24. Who Might Consider an HEI?
25. When might an HEI NOT Be the Best Choice?
26. Questions to Ask Before Signing
27. Want to See What an HEI Might Look Like for You?

1. What Is a Home Equity Investment?

A Home Equity Investment is an agreement between a homeowner and an investment company.

The investor provides you with a lump sum of cash based primarily on your home's value, your existing mortgage debt, your credit, and other qualifying factors.

In return, the investor receives the right to participate in an agreed-upon percentage of your home's future change in value.

Unlike a HELOC or home equity loan:

There is no traditional interest rate.

There is no required monthly principal-and-interest payment.

You continue to own your home.

Depending on the investor and program requirements, the agreement may remain in place for up to 30 years.

Eventually, the investment must be settled, generally when you sell the home, choose to buy out the investor, reach the end of the agreement term, or another termination event occurs.

Good to Know

An HEI is not the same thing as borrowing money at 0% interest.

There may be no traditional interest charge, but there is still a cost. Instead of receiving interest, the investor participates in the future change in your home's value.

2. How Does an HEI Work?

In its simplest form:

Step 1: Your property is appraised.

Step 2: The investor determines how much equity may be available.

Step 3: You choose an investment amount within the amount for which you qualify.

Step 4: The investor provides you with the agreed-upon cash amount, less applicable fees and closing costs.

Step 5: You continue living in and owning your home without making monthly payments to the HEI investor.

Step 6: When the agreement ends, you return the original investment plus or minus the investor's contractual share of the home's change in value.

The amount you ultimately owe therefore depends partly on what happens to your home's value.

3. How Much Money Can I Receive?

Under the guidelines we're using for this guide, the HEI investment generally ranges from:

$30,000 minimum to $500,000 maximum

and may be as much as:

15% of the home's current appraised value.

Higher investment amounts may be available through other HEI programs.

The actual amount available depends on your home's value, existing mortgage balance, credit profile, available equity, the investor being used, and other underwriting factors.

You also don't necessarily have to take the maximum amount available.

And that can be important.

Rob's Tip

Don't automatically take the largest HEI simply because you qualify for it.

The more equity you access today, the larger the investor's percentage of your home's future appreciation can be.

If you need $75,000, there may be little reason to give away additional future appreciation simply because you qualify for $150,000.

4. What Credit Score Do I Need?

For purposes of this guide, we'll use a 620 minimum credit score as the general starting point.

However:

Lower credit scores may be eligible through other available HEI programs.

So don't automatically assume you cannot qualify because your score is below 620.

Credit is only one part of the overall qualification.

5. Do I Have to Qualify Based on Income?

Income and financial qualification requirements vary by HEI investor.

Under the program we're using as the primary guideline for this guide, financial qualification and income documentation are required. However, depending on the investor and program, traditional income documentation may be reduced or may not be required.

HEI underwriting can also be more flexible than traditional mortgage financing.

The program we're using as our primary guideline permits a maximum back-end debt-to-income ratio as high as 65%, with certain situations potentially eligible for an unlimited DTI waiver based upon credit and available equity.

This may make an HEI worth exploring for homeowners who have substantial equity but have difficulty qualifying for a traditional HELOC or home equity loan because of income documentation, debt-to-income ratios, or other qualification issues.

Documentation requirements can vary depending upon whether you're employed, self-employed, retired, or receive income from other sources.

6. How Much Equity Do I Need?

The amount of existing debt compared with your property's value matters.

As a general guideline, the HEI program used for this guide permits a maximum combined loan-to-value (CLTV) of approximately:

70% for a primary residence

Different limits may apply to other eligible property or occupancy types and with different HEI investors.

In plain English, the more equity you already have in the home, the more flexibility you may have.

7. What Properties May Qualify?

Property eligibility varies by investor.

Primary residences are the most common qualifying property type. Some HEI programs may also permit investment properties or other occupancy types under different guidelines.

Program requirements vary depending upon the investor being used, so property eligibility should always be reviewed individually.

8. What Can I Use the Money For?

One attractive feature of an HEI is flexibility.

Depending upon the program and any conditions of approval, proceeds may potentially be used for things such as:

• Paying off higher-interest debt
• Home improvements
• College or education expenses
• Helping children or family members
• Purchasing another property
• Starting or investing in a business
• Building retirement reserves
• Diversifying investments
• Creating emergency reserves
• Other personal financial goals

The investor can sometimes require a portion of the proceeds to pay down existing debt or address necessary property repairs.

The important question isn't simply whether you can access the equity.

It's whether using your home equity for that particular purpose makes financial sense.

9. How Is the Investor's Percentage Determined?

This is one of the most important parts of an HEI to understand.

The amount of cash you receive can be expressed as a percentage of your home's value.

Under the structure we're using for this guide, the investor percentage is generally approximately four times the percentage of the home's value being advanced.

For example:

Before applicable fees and closing costs.

Under the structure used in this example, the investor percentage generally ranges from 20% to 60%.

This is why the amount you take matters.

10. Understanding the 5% Starting-Value Adjustment

This is one of the concepts I believe every homeowner should understand before signing an HEI.

Suppose your home appraises for:

$1,000,000

The investor doesn't necessarily begin measuring appreciation at $1,000,000.

Under the structure we're using for this guide, a 5% risk adjustment is applied.

That would make the starting value:

$950,000

So if the home later sells for $1,200,000, the measured increase isn't $200,000.

It is:

$1,200,000 − $950,000 = $250,000

The investor's percentage would then be applied to that $250,000 change in value.

Good to Know

This starting-value adjustment can materially affect the eventual settlement.

It should be included when comparing the potential long-term cost of an HEI with other home-equity options.

11. What Happens if My Home Goes Up in Value?

Let's continue with a simple example.

Appraised value today: $1,000,000
Adjusted starting value: $950,000
HEI investment: $100,000
Investor percentage: 40%
Future sale price: $1,250,000

The home's change in value would be:

$1,250,000 − $950,000 = $300,000

The investor's 40% share of that change would be:

$120,000

Add the original $100,000 investment:

Potential total settlement: $220,000

This is a simplified hypothetical example, but it demonstrates an important point:

An HEI should not be evaluated solely by the fact that there is no required monthly payment.

The potential future settlement matters too.

12. What Happens if My Home Goes Down in Value?

Under qualifying circumstances, the investor may share in a decline in the property's value.

That can reduce the amount ultimately due.

However, important exceptions can apply, particularly during an initial restriction period or if you voluntarily buy out the agreement.

Under the structure we're using for this guide, for example, there is a three-year restriction period during which the investor doesn't share in a loss if the property is sold.

The specific treatment of a decline in value depends upon the investor, the terms of the agreement, how the agreement is terminated, and when the termination occurs.

13. Do I Still Benefit from Paying Down My Mortgage?

Yes. This is an important distinction.

The investor participates in the contractual change in the property's value.

It does not receive the additional equity you create simply by paying down your existing mortgage principal.

For example, if your mortgage balance falls from $400,000 to $300,000 over time, that additional $100,000 of equity created by paying down the mortgage belongs to you.

14. What Happens if I Remodel My Home?

You can improve your home while you have an HEI.

Under the guidelines we're using, qualifying improvements may receive a Remodeling Adjustment after the initial three-year period.

This is designed so that the investor doesn't automatically participate in value you personally created through qualifying improvements.

There is an important distinction, though:

The amount you spend isn't necessarily the amount of value you added.

If you spend $75,000 remodeling but an appraisal determines the improvements increased the property's value by $50,000, the adjustment would generally be based upon the added value—not simply what you spent.

Routine maintenance such as paint or carpet generally doesn't qualify as a remodeling adjustment.

Specific remodeling-adjustment requirements vary by investor and agreement.

15. What Happens if I Don't Maintain My Home?

This works in the opposite direction.

You're responsible for maintaining the property.

If deferred maintenance causes the property to lose value, the investor may make an adjustment so that it doesn't share in a loss caused by failure to maintain the home.

For example, significant unrepaired damage that reduces the property's value could potentially be added back when calculating the settlement value.

Normal wear and tear is one thing. Significant deferred maintenance that materially reduces the home's value can be another.

16. Can I Sell My Home Whenever I Want?

Yes.

You remain the homeowner and can sell your property.

However, selling during an initial restriction period can change how the settlement is calculated—particularly if the property has declined in value.

That's one reason an HEI generally makes more sense as a longer-term strategy rather than short-term financing.

If you believe you may sell your home in the near future, that should be part of the discussion before entering into an HEI.

17. Can I Pay Off the HEI Early?

Yes.

You generally don't have to sell the property to end the HEI.

You may be able to request an early buyout and have the investor's interest calculated based upon the applicable agreement and a current property valuation.

However, an important detail is that the investor does not necessarily share in a decrease in property value when you voluntarily buy out the agreement.

So don't automatically assume:

"I'll just pay it off in a year or two."

If that's your plan from the beginning, we should compare the potential HEI cost with other home-equity options first.

18. Can I Refinance My Mortgage Later?

Possibly—but this deserves serious consideration before entering an HEI.

The HEI may be considered subordinate financing associated with the property, and some future mortgage lenders or loan programs may not permit that type of shared-equity interest to remain in place.

That doesn't necessarily mean you can never refinance.

It means your future refinancing choices could be affected by the HEI and the requirements of the new lender.

Rob's Tip

If you already know you intend to refinance your first mortgage in the near future, tell me before entering an HEI.

We should look at the entire strategy—not just today's equity needs.

19. Can I Get Another HELOC or Second Mortgage Later?

Potentially, but there may be limitations.

An HEI agreement may establish a Maximum Authorized Debt Limit, restricting how much additional debt can later be placed against the property.

Certain types of financing may also be restricted.

That means if you think you may need another HELOC, second mortgage, reverse mortgage, or other financing later, it's worth discussing that possibility before entering the HEI.

20. What Fees and Closing Costs Should I Expect?

An HEI doesn't have traditional mortgage interest, but it isn't free to establish.

Typical costs may include:

• Transaction or origination fee
• Appraisal
• Property inspection
• Title and escrow charges
• Recording fees
• Other applicable third-party costs

The HEI structure we're using as the primary guideline for this guide includes a 3.9% transaction fee based on the initial investment, plus applicable appraisal, inspection, and other settlement expenses.

Fees and costs can vary by investor and program.

These costs generally reduce the net cash you receive.

So if you're approved for a $100,000 investment, you should not automatically assume $100,000 will arrive in your bank account.

Rob's Tip

When comparing HEI offers, don't compare only the gross investment amount.

Compare the net cash you'll actually receive and the potential future settlement.

21. How Long Can I Keep an HEI?

Depending upon the investor and program, an HEI agreement may have a term of:

Up to 30 Years

You don't necessarily have to keep the agreement for the full term.

It can end earlier through a sale, voluntary buyout, or another termination event specified in the agreement.

If you reach the end of the agreement term, however, the investor's interest must be settled according to the terms of the agreement.

22. What Happens if I Die Before the Agreement Ends?

This isn't necessarily the most comfortable subject to discuss, but it's important.

Under the structure we're using for this guide, if one homeowner dies but another signatory remains alive, the agreement can generally continue.

If the last surviving signatory dies, the agreement becomes subject to settlement provisions. Under this particular structure, the estate generally has a six-month period to settle the agreement.

Requirements may vary by investor and agreement.

If estate planning is an important consideration, you may also want to discuss the HEI with your attorney, financial planner, or other appropriate advisor before entering into the agreement.

23. HEI vs. HELOC vs. Home Equity Loan

There isn't one home-equity solution that's automatically best for everyone.

*Depending upon the HEI investor and program.

A HELOC may make sense when you want ongoing access to equity and are comfortable making monthly payments.

A home equity loan may make sense when you want a fixed amount and predictable monthly payments.

An HEI may deserve consideration when accessing equity without creating an additional required monthly payment is particularly important.

Other home-equity options may also be available depending upon your age, property, income, credit, and financial objectives.

The right answer depends on your situation—not simply which program provides the most money.

24. Who Might Consider an HEI?

An HEI may be worth exploring if you:

• Have substantial equity in your home but don't want another monthly payment
• Need access to a significant amount of cash
• Have income or debt-to-income challenges that make traditional financing difficult
• Want to keep your existing first mortgage instead of replacing it with a higher-rate cash-out refinance
• Are comfortable sharing some future appreciation in exchange for accessing equity today
• Expect to remain in the property long enough for the HEI structure to make sense

An HEI can also be useful simply because it gives homeowners another option.

25. When Might an HEI NOT Be the Best Choice?

An HEI may not be your best option if:

• You expect to sell the home soon
• You expect substantial appreciation and are uncomfortable sharing it
• You qualify for lower-cost traditional financing and can comfortably afford the monthly payment
• You anticipate refinancing your first mortgage soon
• You want maximum flexibility to place additional financing against the property later
• You don't need the money badly enough to justify giving up some future appreciation

Rob's Tip

Sometimes the best home-equity decision is not to access the equity at all.

Home equity is an asset.

There should be a good reason for using it.

26. Questions to Ask Before Signing

Before entering into a Home Equity Investment, make sure you understand:

• How much cash will I actually receive after all fees?
• What percentage of my home's value am I accessing?
• What investor percentage will apply?
• What starting value will be used?
• Is there a starting-value or risk adjustment?
• How is the final settlement calculated?
• Is there a maximum settlement amount or appreciation cap?
• What happens if my home appreciates substantially?
• What happens if my home declines in value?
• Is there an initial restriction period?
• What happens if I sell during that period?
• Can I buy out the agreement without selling?
• How is an early buyout calculated?
• How will remodeling affect the calculation?
• What are my responsibilities for maintaining the property?
• Could the HEI interfere with a future refinance?
• Can I obtain another HELOC or second mortgage?
• What happens at the end of the agreement term?
• What happens to the agreement if I die?

And perhaps most importantly:

How does this compare with my other home-equity options?

27. Want to See What an HEI Might Look Like for You?

A Home Equity Investment can provide access to a substantial amount of home equity without creating another required monthly payment.

But that's only half of the equation.

Before deciding, I believe you should understand what you're receiving today, what you're giving up in return, and what other options may be available.

I can help you compare an HEI with other potential home-equity solutions, including traditional HELOCs, fixed home equity loans, alternative-documentation programs, reverse second mortgage options when applicable, and other available programs.

Even if you already have a current HELOC or second mortgage, we may be able to review whether another option could improve your rate, terms, monthly payment, or overall financial strategy.

The goal isn't to put you into a particular program.

It's to help you understand your choices so you can decide which option makes the most sense for you.

Robert “Rob” Clark
Home Loan Consultant
Firestone Financial Group

Call or Text: 209-227-7745
Alternate: 559-476-9279
Email:rbrtclark53@gmail.com
Website: robertclarkloans.com

NMLS #357788 | Firestone Financial Group NMLS #301522
CA DRE #01148307 | Equal Housing Lender

Important Information

Program availability, eligibility requirements, credit requirements, income requirements, property requirements, investment amounts, valuation adjustments, fees, agreement terms, investor percentages, settlement calculations, appreciation-sharing provisions, remodeling adjustments, restriction periods, and other terms vary by investor and are subject to change.

A Home Equity Investment, Home Equity Agreement, or Shared Equity Agreement is not a traditional mortgage loan and generally does not require monthly principal and interest payments. The investment must ultimately be settled according to the terms of the applicable agreement.

Examples contained in this guide are hypothetical and provided for educational purposes only. They are not a quote, offer, commitment to provide an HEI, prediction of future property value, or guarantee of financial results. Actual terms and settlement amounts will depend upon the applicable investor agreement and individual circumstances.

Homeowners should carefully review all agreement documents before proceeding and may wish to consult with appropriate legal, tax, financial, and/or estate-planning professionals regarding their individual circumstances.