What is a home equity investment (HEI)?

The one-sentence version

A home equity investment (HEI), also called a home equity agreement (HEA) or shared equity agreement, is a contract where an investment company gives you a lump sum of cash now and in return gets a slice of what your home is worth later. You make no monthly payments and pay no interest. Instead, you settle the whole thing in one payment years down the road, usually when you sell, refinance, or reach the end of the term.

How an HEI works, step by step

1. You apply. The company checks your home's value, how much equity you have, and your credit. Requirements are usually looser than a bank's (some accept credit scores around 500), and there is typically no income test, because you are not making payments.
2. They make an offer. You are quoted a cash amount, usually from about $15,000 up to several hundred thousand dollars, limited to a slice of your home's value (commonly 15% to 27%) and to how much total debt the home already carries.
3. Fees come out. An origination or processing fee, commonly about 3% to 5% of the investment, plus appraisal and closing costs, is deducted, so the cash you receive is less than the headline number.
4. You get the cash. No monthly bill arrives. Nothing is due month to month.
5. You settle later. At the end of the term (10 years with some providers, up to 30 with others) or when a triggering event happens, such as a sale, a refinance, or choosing to buy the company out, you pay the settlement amount set by the contract.

A worked example

Say you take $100,000 against a $750,000 home with a $300,000 mortgage, and settle 7 years later after the home appreciates 4% a year. Applying each major provider's published terms, our model puts the settlement at roughly $237,000 to $263,000. That works out to an effective cost of about 14% to 16% a year on the cash you actually received, compared with about 8.5% for a typical HELOC. Your own offer will differ, which is why you should run your numbers.

What an HEI actually costs

Providers rarely put their cost in a single number. It has five moving parts:

• Fees: taken up front, so you net less cash than quoted.
• The share structure: some providers take a share of your home's gain; others take a share of its entire value at settlement.
• The multiplier: the provider's share is usually a multiple of the percentage it invested. Invest 10% of your home's value and you may owe 16.5% to 20% of its future value, or 24% to 40% of its gain, depending on the provider.
• The starting-value basis: some contracts measure gain from a "risk-adjusted" value set below your home's real value (discounts of 5% to 27% appear in published examples), so you owe something even if your home never appreciates.
• The cost cap: some providers cap their annualized return, which protects you if your home booms. Published caps we have seen range from about 13% to 20% a year, and some providers publish none.

HEI vs HELOC, home equity loan, and reverse mortgage

In-depth comparisons on our sister site: HEI vs HELOC, HEI vs home equity loan, HEI vs reverse mortgage, and HEI vs HEA.

For people who qualify at a reasonable rate and can manage a payment, a HELOC or home equity loan is usually cheaper and more predictable. An HEI earns its place when a monthly payment is not workable, when income or credit make a HELOC hard to get, or when you specifically want to trade future upside for zero monthly cost today.

Who an HEI suits, and who should avoid it

An HEI may fit if you…

• Are equity-rich but cash-constrained, and cannot comfortably take on a monthly payment.
• Have irregular income or a credit profile that makes a HELOC hard to get.
• Expect modest appreciation where you live, since cost rises with your home's growth.
• Have a realistic plan to settle within the term, through a sale, a refinance, or savings.

An HEI is probably wrong if you…

• Qualify easily for a HELOC or home equity loan at a reasonable rate.
• Live in a fast-appreciating market and plan to stay a long time without a cost cap.
• Expect to settle within a few years, when effective costs of 20% a year or more are common.
• Are not confident you could meet a large lump-sum settlement when the term ends.

Risks and watch-outs

• The bill is unknown until it is due. Settlement depends on your home's future value, so you will not know the exact amount until you settle.
• Appreciation makes it expensive. A strong housing market is good for you, and costly on an HEI.
• Short holds can be costly. Discounted starting values and multipliers front-load cost, so settling early often hits the cost cap.
• It is a lien on your home. The company records an interest against the property, much like a second mortgage.
• Settlement can be hard. Ten-year terms in particular can force a sale or refinance at an inconvenient time.
• Regulatory scrutiny is rising. Federal and state regulators have questioned disclosure and cost transparency in this market, so read the agreement closely and consider independent advice.

Frequently asked questions