Key Takeaways
- A HEI payout is based on home value at settlement, so declining values reduce the investor’s return.
- If your home’s value drops, you may owe less to the investor but could face less flexibility to refinance, sell, or borrow against your equity.
- HEIs work best when homeowners plan for multiple market scenarios, making it easier to navigate market downturns.
When homeowners consider a home equity investment (HEI), projections often assume rising home values.
However, the housing market doesn’t move in a straight line and values can flatten or decline, sometimes for years. When that happens, it’s normal to wonder if you’ll face a repayment problem with your HEI.
But an HEI isn’t a loan with a balance that grows regardless of market conditions. Instead, it’s an equity-based agreement that settles based on what the home is worth at the end of the term. And when home values fall, the financial outcome changes for both the homeowner and the investor.
In this article (Skip to...)
- Why home value matters with an HEI
- How a decline affects the investor’s share
- What a lower investor payout means for the homeowner
- How falling values can change exit decisions
- Why HEIs reward conservative planning
- The bottom line
Why home value matters with an HEI
With traditional home equity loans or HELOCs, the amount you owe is driven by interest rates and repayment schedules. Even if your home’s value drops, the loan balance stays the same. But an HEI works differently — there’s no amortizing balance and no interest compounding. Instead, the agreement is built around the home’s future value.
At settlement, the investor’s payout is calculated as a share of the home’s value, appreciation, or both, depending on the contract. That means appreciation increases the investor’s returns, while declining home values reduce them.
How a decline affects the investor’s share
Because an investor’s return is tied to home value, falling prices reduce what the investor receives at settlement. If the home appreciates less than expected, the payout shrinks. If the home’s value declines, the investor’s return may be far lower than projected. This is one of the main differences between HEIs and traditional home equity products — the investor doesn’t receive a fixed payment regardless of market conditions.
For homeowners, this often comes as a surprise. Marketing around HEIs frequently emphasizes the long-term cost if values rise sharply, but the same mechanism works in reverse when markets soften. The investor’s share is smaller because the underlying asset is worth less.
What a lower investor payout means for the homeowner
When home values fall, homeowners may owe less to the investor than they originally anticipated. That can ease some of the pressure around settlement, particularly for those who were concerned about a large future obligation.
And while a reduced payout seems like a benefit, it also means the homeowner has less total equity to work with. Their remaining share of the home is smaller, even if the investor’s portion shrinks as well. So while the HEI obligation may be easier to satisfy on paper, limited equity can still complicate refinancing, restrict borrowing options, or affect sale timing.
How falling values can change exit decisions
Because HEIs are settled based on value, a downturn can influence when and how homeowners choose to exit the agreement. Selling the home may feel less attractive if prices are down, even if the investor’s share is smaller. Some homeowners may prefer to wait for market conditions to improve before listing, particularly if they’re not facing a contractual deadline.
Refinancing can also become more challenging. Lower home values reduce loan-to-value ratios, which may limit refinance eligibility or result in higher rates. Even though the investor payout is reduced, the remaining equity may not support the financing needed to buy out the HEI.
Compare home equity lenders now. Start here
What experts are saying
Michael Gifford, CEO of Splitero
“HEIs tend to work best for homeowners planning to stay in their home for a longer period of time. HEIs aren’t designed to be a quick in-and-out product.”
Why HEIs reward conservative planning
One of the biggest risks with an HEI isn’t a sudden drop in home value; it’s unrealistic expectations about future home equity. Because HEIs don’t have fixed balances, the most important planning happens before the agreement is signed. Homeowners who model multiple scenarios, including flat or declining markets, are better positioned to navigate settlement without stress.
That means assuming appreciation may be modest, not guaranteed. It means understanding that reduced investor payouts often coincide with reduced homeowner flexibility. And it means thinking through exit options well before the end of the term. Flexibility is the real advantage of an HEI, but only when it’s paired with realistic assumptions.
The bottom line
When home values fall, your HEI settlement adjusts accordingly.
The investor’s payout shrinks as the home’s value declines, reducing the homeowner’s obligation. But it also shrinks the equity available for refinancing, selling, or borrowing.
The agreement does exactly what it’s designed to do: share market risk rather than locking homeowners into a fixed repayment path.
Time to make a move? Let us find the right mortgage for you
