- Home equity contracts provide a lump sum in exchange for a share of your home’s future value.
- The amount owed depends on how your home’s value changes over time.
- Depending on market conditions, repayment may be higher or lower than the amount received.
- Agreements may include fees, timelines, and property-related conditions.
- Comparing alternatives such as HELOCs, home equity loans, or refinancing can help you determine which best fits your financial situation.
As home values continue to rise and everyday expenses put pressure on household budgets, many homeowners are exploring ways to access home equity without taking on additional monthly debt. One option you may encounter is a home equity contract (HEC), also known as a home equity investment (HEI) or a shared equity agreement.
If home equity contracts are new to you, you’re not alone. These products can offer quick access to cash, but they often come with complex terms, long-term costs, and significant risks.
Before making a decision, it’s important to understand how they work. Some home equity contracts may require a large future repayment, additional financing, or even the sale of your home. They may also reduce the equity you can access later.
This blog provides a helpful overview of home equity contracts and what to consider before moving forward. For a deeper look, read this article by the Consumer Financial Protection Bureau (CFPB).
What is a home equity contract?
A home equity contract is a financial agreement in which a homeowner receives a lump-sum cash payment upfront in exchange for a portion of their home’s future value. Home equity contracts are not traditional loans, but they are financial agreements that function similarly to financing and must be repaid based on the terms of the contract.
Unlike traditional loans:
- There are no monthly payments during the term, however, a large lump-sum repayment is required at the end of the contract, which may require selling the home or obtaining new financing.
- There’s no standard interest rate.
Instead, you agree to share a percentage of your home’s future appreciation (or depreciation) with an investor.
How many home equity contracts work.
Here’s a simple breakdown of how a home equity contract typically works:
- You receive cash upfront based on your home’s current appraised value
- You make no monthly payments during the contract term
- The agreement typically lasts 10 to 30 years
- When the term ends, you repay:
- The original amount borrowed in a single lump sum plus a percentage of your home’s value change
This structure can feel flexible in the short term, but it’s important to understand the long-term impact.
Why homeowners consider home equity contracts.
Many homeowners search for “how to get equity out of your home without a loan” or “no monthly payment home equity options.” Home equity contracts are often marketed as a solution.
Common reasons include:
- Accessing cash without increasing monthly debt payments
- Not qualifying for a home equity loan or HELOC
- Paying off high-interest debt (like credit cards)
- Covering major expenses (medical bills, home improvements, etc.)
While these benefits can be attractive, they should be carefully weighed against the risks.
Risks of home equity contracts: what to watch out for.
1. You give up future home value.
One of the biggest downsides is sharing your home’s appreciation. If your home’s value increases significantly, you could owe far more than you originally received. This can reduce the equity you’ve worked hard to build.
2. Costs can be higher than expected.
Because these agreements don’t use traditional interest rates, the true cost can be harder to evaluate. In some cases, repayment may exceed the cost of more traditional financing options. Per the CFPB, “Home equity contracts often carry features that boost the settlement amount due from the consumer and insulate home equity contract providers from losses in all but extreme home price declines. Under many contracts, the settlement amount grows at a rate of 19.5-22% per year in the early years, which is substantially higher than interest rates on most home-secured credit, and somewhat less than interest rates on unsecured debt like credit cards.”
3. Fees and closing costs.
Even without monthly payments, you may still pay:
- Origination fees
- Appraisal fees
- Closing costs
These reduce the amount of cash you receive.
4. Restrictions on your home.
Some contracts may include conditions such as:
- Maintaining the home to certain standards
- Limitations on refinancing or taking additional loans
- Approval requirements for major decisions
5. Risk if home values change.
Depending on the contract:
- You may share losses if your home value decreases
- Or you may still owe a minimum return to the investor
Terms vary, making it essential to read the fine print.
6. Balloon payment or forced sale.
At the end of the contract, you may need to:
- Sell your home, or
- Buy out the investor’s share
According to the CFPB, “…homeowners must repay the home equity contract company in full with a single lump sum by the end of the contract term. Some consumers might get a home equity contract and plan to repay it by selling their home. However, homeowners who wish to keep their homes generally need to either liquidate other assets or qualify for a loan. Those with insufficient credit or assets might be unable to repay the full settlement amount. As a result, they might be forced to sell their home or face foreclosure.”
In short, if you’re unable to repay the contract in a single lump sum at the end of the term, you may need to sell your home or take out another loan to cover the amount owed, potentially adding new monthly debt to your budget.
Pros and cons of home equity contracts.
Pros:
- No monthly payments during the term however, a large lump-sum repayment is required at the end of the contract, which may require selling the home or obtaining new financing.
- Access cash without traditional monthly loan payments (but still requires repayment based on home value changes).
- Qualification requirements may differ from traditional loans.
Cons:
- Potentially high long-term cost
- Loss of home equity and future appreciation
- Complex terms and conditions
- Limited flexibility with your property
- Could be forced to sell your home to pay off the contract
Alternatives to home equity contracts.
Before moving forward, it’s smart to explore other home equity options:
1. Home equity loan
- Fixed interest rate
- Predictable monthly payments
- Easier to calculate the total cost
We offer Fixed Rate Home Equity Loans with rates as low as 6.99% APR* when you sign up for Direct Deposit and Auto Pay. You can borrow up to 100% of your home’s equity for qualified borrowers, limits vary based on underwriting and property eligibility (80% LTV for Texas residents). Loans are up to $750,000, and terms are up to 240 months. As noted above, the rate is fixed, so you’ll know exactly how much you’ll owe each month for the life of the loan.
2. HELOC (Home equity line of credit)
- Flexible borrowing
- Lower interest rates than many other options
- Pay interest only on what you use
If you want the flexibility to tap into funds as needed, our Home Equity Line of Credit (HELOC) could be right for you. As with our home equity loan, you can borrow up to 100% of your home’s equity. Rates are as low as 6.74% APR* with Direct Deposit and Auto Pay. Visit our website for important conditions. Plus, with a HELOC, your loan interest may be tax-deductible; consult a tax advisor regarding your specific situation.
3. Cash-out refinance
- Replace your mortgage with a larger one
- Access equity at potentially lower rates
- Ideal when interest rates are favorable
A cash-out refinance replaces your current mortgage with a larger loan, giving you access to your home equity as cash. It can offer lower interest rates than other borrowing options and provides a single, predictable monthly payment.
Here’s an example of a cash-out refinance. Imagine your home is worth $400,000 and you still owe $250,000 on your mortgage. With a cash-out refinance, you refinance your loan for $300,000. You use $250,000 to pay off your existing mortgage, and you receive the remaining $50,000 in cash. You can then use that money for things like home improvements, debt consolidation, or other major expenses, while making payments on your new $300,000 loan. Talk to one of our mortgage experts at 323.209.6326 to learn the latest rates and terms.
4. Personal loan
- No home collateral required
- Faster approval process
- Good for smaller expenses
A personal loan offers predictable payments, a fixed rate, and a clear payoff timeline, making it easier to budget. Unlike a home equity contract, you don’t give up a share of your home’s future value or face property restrictions. Our Signature Loan starts as low as 9.99% APR** with Direct Deposit and Auto Pay, and you can borrow up to $40,000. You’ll have up to 60 months to repay the loan.
5. Budgeting and Emergency Savings
- Reduce expenses temporarily
- Avoid long-term financial tradeoffs
- Strengthen your overall financial health
We understand budgeting can be challenging even without rising prices. If you need help making a budget or improving your existing money management skills, we can help. Visit our online Balance Financial Education Center for information on budgeting, saving, managing debt, retirement, and more. If you prefer a one-on-one approach, our Certified Financial Counselors are ready to assist you. They’ll listen to your situation and offer tips and input to help you manage your financial well-being.
Final thoughts: Is a home equity contract right for you?
Home equity contracts can feel like a convenient way to unlock cash, especially if you’re trying to avoid monthly payments or don’t qualify for traditional financing. However, they are not a one-size-fits-all solution.
Before you make a move, take time to understand the long-term impact. Giving up a portion of your home’s future value can significantly impact your long-term financial goals.
Before signing any agreement, compare all available options, review the fine print carefully, and consider speaking with a financial professional. Contact our mortgage experts directly at 323.209.6326 to discuss your options. To set an appointment, click here. Making an informed decision today can help protect your home and your financial future for years to come.
This article is provided for educational purposes only and is not intended as financial or legal advice. Members should contact the Credit Union for guidance regarding their individual situation.
*APR = Annual Percentage Rate. APR is the cost of credit expressed as a yearly rate. “As low as” APRs are available to qualified applicants; your actual APR may vary based on creditworthiness, loan-to-value (LTV), and other underwriting factors. Rates/APRs are subject to change at any time. Home equity loans and home equity lines of credit are secured by your home.
HELOC APR is variable and may increase after account opening. The variable APR is based on the Wall Street Journal Prime Rate (the “Index”) plus a margin. The margin is determined at account opening. As the Index changes, your APR may change. Closing costs are paid by the member; third-party fees (such as appraisal, title, recording, and other closing costs) may apply and vary. No prepayment penalty.
**APR = Annual Percentage Rate. APR is the annual rate of interest that is paid on an investment, without taking into account the compounding interest within that year. Rates are subject to change at any time. 1.00% rate discount is for a minimum of $1,000 monthly ACH Direct Deposit or Agent Net Check into a Farmers Insurance Federal Credit Union Checking Account and Automatic Payment/Folio Deduction as a repayment method to qualify. Rates are subject to change at any time.
Membership eligibility required. Equal Housing Lender.
