It’s a truth universally acknowledged that the vast majority of homeowners are simply sitting on an enormous amount of equity. That equity is trapped in their homes, where it can’t be used to help them with their pressing needs like saving for retirement, building a business, renovating the aging house, climbing out of debt, and more. It’s possible to convert that equity asset into cash to tend to those needs, but the usual suspects–home equity loans, HELOCs, reverse mortgages, refinancing–are debt products that, ultimately, might hurt as much as they help due to burdensome monthly payments and debilitating interest rates.
Enter the equity sharing agreement.
The hallmark of the equity sharing agreement is this: they don’t demand monthly payments or charge interest. In other words, an equity sharing agreement is neither a loan nor a method for replacing debt with, well, debt.
How Does an Equity Sharing Agreement Work?
An equity sharing agreement–sometimes called a “home equity agreement” or “shared equity agreement”--empowers the homeowner to tap into their otherwise illiquid home equity, giving them a percentage of the home’s value in cash. In exchange, instead of the monthly payments and interest charges that other methods offer, the homeowner will pay them the original amount plus an agreed-upon percentage of the home’s change in value. Depending on the company with whom one partners, you can settle the agreement after a number of years, or at the sale of the home, when you decide to move.
One way to look at it: when you unlock your equity, the company invests in your home and its likelihood to appreciate in value. When you sell your home (or the agreement period is up), they receive their return on that investment. If the value of your home doesn’t increase much–or even decreases–their return won’t be as high. A loan builds in interest rates in order to ensure that the lender makes money, but equity sharing agreements have rooting for you and your home built into their very anatomy.
Consider Unison, who pioneered the equity sharing agreement. A key step in the Unison application process is the appraisal, in which an independent, third-party appraiser tours the home and, taking note of its condition and characteristics, as well as the recent sale prices of comparable homes in the area, estimates its current value. Unison takes that number and applies a 5.0% Risk Adjustment to establish the home’s “starting value.”
With Unison, the homeowner unlock up to 15% of the appraised value. Once they receive the funds, they are free to use it however they wish–popular uses include performing renovations, erasing debt, preparing for retirement, diversifying investments, and starting a business. Unison Agreements have a set term of 30 years, which means that the homeowner can choose to buy out the Agreement during that time, or, sell their home and pay Unison out of the proceeds.
Usually, the agreement ends when the property is sold. However, if the homeowner chooses to buy out the agreement instead, another appraisal is conducted to determine the home’s “ending agreed value.” That number is compared to the “starting value” to discover what the change in value has been (for example, has the house increased in value by $100,000?). Ultimately, the homeowner will pay Unison the agreed-upon percentage of that change, as well as the amount of the initial funds the homeowner received.
Equity Sharing Agreements VS Other Options
Now that you know a bit more about that new kid on the block, the equity sharing agreement, let’s examine it in the context of its equity-accessing compatriots.
Home Equity Loan
Also known as a “second mortgage,” a home equity loan enables a homeowner to borrow a specific amount of money from a lender based on the property's appraised value minus any outstanding mortgage balance. The funds arrive as one lump sum, and the loan is repaid in installments over a fixed term–with interest.
Equity sharing agreements also provide homeowners with a lump sum up front; however, the homeowner does not make regular payments, and that initial sum does not accumulate interest.
The home equity line of credit (HELOC) is precisely what it sounds like–a revolving line of credit in which the homeowner borrows against the equity in their property. Think of it like a credit card with a set credit limit; you can use it, or not, as you please. During the initial draw period, you only need to pay off the interest on whatever you did spend. However, that period is followed by the repayment period, during which the entire balance must be repaid.
The interest rates for HELOCs are usually lower than that of credit cards, but they also tend to be variable and therefore difficult to predict and incorporate into planning and one’s long-term budget.
As we’ve already established, equity sharing agreements don’t require monthly payments or accrue interest. This is the biggest difference between the two. It’s important to remember that an equity sharing agreement is not a loan.
“Refinancing” refers to the process of replacing an existing loan or mortgage with a new one, usually with more favorable terms. When you refinance a loan, you pay off the existing loan with the proceeds from the new loan, resulting in a new repayment structure and potentially different interest rates or loan terms.
One of the primary motivations for refinancing is to secure a lower interest rate, which can result in reduced monthly payments or overall interest costs. In addition, refinancing allows borrowers to modify their loan terms; for example, homeowners can extend or shorten the repayment period.
Cash-out refinancing involves taking out a new loan for more than the remaining balance on the existing mortgage. The homeowner can then use the excess funds however they need. However, refinancing merely replaces one loan with another, and is subject to many of the same disadvantages. While better interest rates are, of course, better, interest is still interest. At the risk of sounding like a broken record, equity sharing agreements do not involve interest.
A reverse mortgage is a loan available to homeowners who are typically at least 62 years old. It allows them to convert a portion of their home's equity into cash, without the need to sell the property or make monthly mortgage payments. The loan is repaid when the homeowner sells the home, moves out, or passes away.
Ultimately, the loan is typically repaid from the proceeds of the home sale. If the proceeds are insufficient to cover the loan, the remaining balance is usually absorbed by the lender or the Federal Housing Administration (FHA) insurance fund.
While a reverse mortgage does not require monthly payments during the homeowner’s continued tenure in the home, the equity borrowed does accrue interest. Many who take out equity sharing agreements also pay out the balance of the agreement from the proceeds of selling the home; however, rather than interest, these homeowners pay the agreed percentage of the home’s change in value.
What Are the Benefits of Equity Sharing Agreements?
Obviously, two of the biggest benefits of an equity sharing agreement are the lack of monthly payments and interest! It can be difficult to juggle a plethora of monthly payments, and stressful beyond measure to be at the mercy of economically-dependent interest rates.
Unison’s equity sharing agreements in particular contain multiple benefits for homeowners. When a homeowner partners with Unison, they have access to the Home Partnership Team, a team of compassionate, knowledgeable members completely dedicated to answering questions, brainstorming solutions to problems, and providing access and exposure to resources.
After three years, Unison homeowners can also apply for a Remodeling Adjustment, wherein value added to their home via remodeling or renovations can be subtracted from the ending value, and ultimately reduces what is paid to Unison at the end of the agreement.
As we’ve already noted, Unison’s equity sharing agreements are not loans. Because they invest in your home alongside you, they are your partner in a journey. The Unison Homeowner Promise boldly claims, “Owning with Unison is better”--and they are committed to upholding that assertion through accessibility, transparency, empathy, and alignment.
Applying for a Unison Equity Sharing Agreement
Sound good? You can type in your address on the Unison website to receive a quick, free estimate of how much equity you could access from your home. When you apply, Unison will evaluate your credit, income, and the property–all of which can be done without any financial obligation to you, or impact to your credit!