Understanding the True Cost of a Home Equity Investment (HEI)

Looking for a way to tap your home’s accrued equity without selling or pursuing a home equity loan or HELOC?

A home equity investment (HEI) could be the ideal solution. This involves getting cash from a company or investor in exchange for a portion of your home’s future value.

As with any financing option, it pays to do your homework. Take the time to learn more in our guide on HEIs, their pros and cons, the trade-offs involved, different repayment scenarios, worthy candidates, and alternative options worth considering.

• How HEI payouts work
• The appeal of HEIs
• Understanding HEI payout costs
• The HEI trade-off
• Repayment scenarios
• Who an HEI makes sense for
• Risks and limitations
• Other home equity options

How HEI payouts work

A home equity investment – also called a home equity agreement – allows homeowners to access the value locked up in their property without needing to sell it. Homeowners receive cash up front from an HEI provider in exchange for a portion of their property’s future value.

On average, the provider will take 1.5% to 2% (or more) of your home’s total value or future appreciation for every 1% of your property’s value you take in cash. Here, you’re technically not borrowing money: You are selling a slice of your future appreciation.

What experts are saying

Michael Gifford, CEO of Splitero

“Most homeowners now have 50% or more equity in their home, but rising rates make traditional borrowing unattractive or impossible.”

With this agreement, there are no monthly payments or interest charges, unlike other forms of financing. When you sell your home, transfer the property title, or the HEI contract ends (often after 10 to 30 years), you must repay the company based on what your home is worth at that time.

The appeal of HEIs

The main benefit of an HEI is the flexibility it provides.

“There is no monthly payment of principal and interest, as there is with a home equity line of credit or loan, allowing homeowners to defer the cost,” explains Michael Micheletti, chief marketing officer for Unlock, an HEI provider.

“How long it is deferred, or the length of the term, will depend on the provider – but it’s commonly 10 or 30 years. An added benefit is that homeowners don’t need to wait if they don’t want to. They can settle as their plans take shape, at any point before the end of the term. That flexibility to settle on their own schedule and maintain cash flow now has real value for a lot of people.”

HEIs help equity-rich, cash-flow-tight owners tap funds without adding a new monthly payment, which is attractive when interest rates are high.

“You can preserve your low-rate first mortgage while funding urgent repairs, consolidating higher-cost debt, or bridging to an expected home sale,” notes Ryan Fitzgerald, a Realtor with Raleigh Realty. “Underwriting can be more flexible for some households because the agreement is anchored to the property rather than your income alone. And if you plan to move within a few years in a steady market, the trade-off can be acceptable for the breathing room it provides.”

Plus, the money arrives relatively quickly – usually within 2 to 4 weeks.

“Consider that banks often take 45 to 60 days for home equity loans. When you need $50,000 for medical bills or business opportunities, speed matters,” personal finance expert Andrew Lokenauth says.

Additionally, you won’t be adding to your debt load on paper. This can help matters if you are attempting to qualify for other financing down the road, as credit reports don’t show an HEI as debt.

Understanding the payout cost

Keep in mind that all finance options carry some level of risk. But one particular feature of HEIs that should cause you pause is that the final settlement can be estimated but not guaranteed in advance.

“That settlement is based on the future value of your home and when you decide to settle – both of which are unknown at the time of signing,” adds Micheletti.

That settlement amount can be substantial.

“I’ve seen deals where someone got $30,000 from an HEI but owed back $95,000 after eight years of strong appreciation. The effective cost for them was over 15% annually – way more than any loan would have charged,” says Lokenauth.

“Be mindful that appreciation multiplies your cost exponentially. A fixed-rate loan’s cost is known. But with an HEI, you may end up paying for house price inflation that you didn’t cause or control. And time compounds everything – the longer you hold the HEI, the more appreciation accumulates, and the bigger your settlement becomes.”

Comparing an HEI to a home equity loan or HELOC: You can save on interest and payments now, but you may give up more value later than those interest charges would have totaled.

“There is also valuation and contract risk, including methods you may disagree with and restrictions on renting out your house if you move, blocking you from taking out a second mortgage to cover emergencies, or requiring you to get their permission before beginning major renovations,” cautions Fitzgerald.

The trade-off: No monthly payments vs giving up appreciation

The prospect of not having to make monthly payments is tantalizing, but remember that “no payments” doesn’t mean “low cost.” An HEI shifts cost and risk to the future, and you could owe a lot more than you bargained for. That’s why many homeowners opt for HELOCs and home equity loans instead.

“An HEI defers the cost and requires no payment until settlement, but you’ll have a lump sum due at that time because you are not making regular payments,” says Micheletti. “A HELOC, by contrast, is split between a draw period, when you pay interest only, and a repayment period, when you pay principal and interest. And it often carries a variable interest rate to start, which means the monthly payment can change significantly over time. A home equity loan, on the other hand, has a fixed interest rate, which translates to consistent monthly payments.”

Eligibility qualifications also differ between HEIs, HELOCs, and home equity loans, with varying credit score, income, and loan-to-value ratio requirements involved.

“Home equity loans and HELOCs accrue debt. You borrow money, you pay interest, you make monthly payments. The terms are clear, and the cost is predictable. But HEIs aren’t loans at all – they are equity-sharing agreements. HEIs charge you based on what your home becomes worth, which is the critical difference,” Lokenauth adds. “With an HEI, you feel zero pain today, but you are loading up a massive future obligation. With a loan, each payment reduces what you owe. Within HEI, your obligation typically grows every year as home values rise.”

Repayment scenarios

Let’s say your home is worth $400,000. An HEI investor or company offers to give you $40,000 in cash today for a 15% stake in your home’s future value.

“In this scenario, if your home increases to $600,000 in value, you would owe 15% of $600,000 – equating to $90,000 on the original $40,000 provided to you in cash,” says Lokenauth.

Or, using that hypothetical, assume your $400,000 home grows in value to about $487,000. You gave up a 15% stake for $40,000, but now you only owe the HEI company $73,000.

“Here, you paid $33,000 for using $40,000 for a decade, which is a 6% to 7% annualized cost,” Lokenauth adds.

But what if your home enjoys a high 8% annual appreciation rate? That means your $400,000 property could reach a value of $863,000 after your 10-year HEI contract ends. If so, your 15% stake is now worth $129,000.

“For the $40,000 you received, you owe back $89,000 in profits, which is over 12% annually – worse than most loans,” warns Lokenauth.

Note that, while annualized cost is not an interest rate, it can be a useful comparison tool if you are considering another product with a 10-year borrowing term, Micheletti points out.

“Consider that the APR on a home equity loan or HELOC could fall anywhere between 6% and 10% right now, depending on your credit, length of term, and other factors,” he says. “If the estimate on an HEI seems comparable to a homeowner, it may be worth it to them to have no monthly payments in the meantime.”

Repayment scenarios tool

Again, how much your home’s value will change is directly tied to your final settlement amount. Fortunately, many HEI companies offer cost calculators on their websites or apps that can help crunch the numbers and map out different scenarios.

To help you estimate payout amounts under different appreciation scenarios, use this handy calculator we’ve provided.

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Who an HEI may make sense for and who should be cautious

Good HEI candidates include homeowners who are likely to remain in their properties for at least 10 years with significant equity accrued.

Ideally, you should own at least three times as much as you’re asking for in cash, which ensures that even after the company takes its cut later, you’ll still walk away with a healthy amount of profit.

“This provides enough cushion against market shifts and unforeseen events that will require an earlier move,” says Chris Iverson, a Realtor at Golden Gate Sotheby’s International Realty. “But if you have lower equity amounts or think you’ll need to sell your home sooner, an HEI is increasingly risky.”

On the other hand, if you are in a stable or declining market and need one-time cash but plan to move within 5 to 7 years, an HEI is worth considering.

“In addition, older homeowners who want to age in place for 5 to 10 years and then downsize can make this work. You’re not keeping the home forever, so sharing future upside matters less,” Lokenauth says. “However, young first-time homeowners planning to stay put for 15 to 20 years are terrible fits. You are giving away your primary wealth-building tool during its best growth years.”

An HEI can be particularly useful for homeowners who value the flexibility to settle on their own schedule and maintain cash flow now, or for a retiree or entrepreneur who could benefit from the less rigid income requirements, per Micheletti.

“Homeowners who know they want to sell soon should consider that the annualized cost of an HEI tends to lessen over time,” he explains. “So another financing option could be a better fit if they want to settle within the first year or two.”

Overlooked risks and limitations

The biggest underestimated risk of an HEI is settlement shock.

“I’ve seen people who were forced to sell the homes that they wanted to keep because they couldn’t afford the high settlement costs,” says Lokenauth. “Another concern is that you lose flexibility on when you can move and the timeline is no longer fully yours. If markets are down and you want to wait, tough luck – the HEI contract might force settlement anyway.”

Iverson recommends looking closely at the terms on your HEI contract to ensure it doesn’t have restrictions on renting out the home short- or long-term or making renovations.

Be aware that many HEIs have hidden conditions, too: Some will cap how low your settlement can go even if values drop. On the flip side, many also have cost caps that limit the final settlement amount in cases of extreme appreciation or early settlement.

“And appreciation formulas can be rigged. Some companies use their own appraiser for settlement value, not market comps,” Lokenauth says. “I’ve seen disputes where homeowners think their place is worth $500,000, but the company says $575,000.”

HEIs vs other home equity options

Not convinced that an HEI is right for you? Here are a few other options worth considering that also tap equity:

The bottom line

A home equity investment can be a worthy and flexible alternative to traditional loans, one that promises quick cash – with no monthly payments or interest – in exchange for a percentage of your home’s future worth.

But the drawbacks include settlement shock, whereby your home may appreciate more than expected, making your settlement a lot more costly than a typical loan, along with contract restrictions on renovations and renting. The trade-off involves forfeiting a substantial portion of your home’s future appreciation and relinquishing some control over how you manage your property.

That’s why it’s crucial to do the math and model different outcomes before committing to an HEI. Consult closely with a financial planner or accountant before moving forward.