Renovating a home can be exciting! Updating a kitchen, finishing a basement, or finally adding that outdoor living space you’ve dreamed of. But funding those projects can be a challenge.
Many homeowners turn to their home equity as a source of cash, and one of the most common options is a traditional home equity loan. However, there might be an even better path, depending on your situation: an Equity Sharing Home Loan (ESHL). Understanding how each works – and which might be a better fit for your goals – can make a big difference in both your budget and your long-term plans.
How a Traditional Home Equity Loan Works
A home equity loan is your typical second mortgage. You borrow a fixed amount based on the equity you’ve built in your home, repayable over a set term with a fixed interest rate. The appeal is that it provides a lump sum upfront – exactly what many homeowners need to fund renovations.
There are some advantages:
- Predictability. Monthly payments are fixed, making budgeting straightforward.
- Ownership. You retain full control of your home’s future appreciation.
- Interest rates. Typically lower than unsecured loans or credit cards.
But there are also challenges that homeowners should consider:
- Higher monthly payments. Because you’re paying both principal and interest over the loan term, monthly obligations can be significant, particularly on larger renovations.
- Qualification hurdles. Lenders look closely at income, credit history, and debt-to-income ratios.
- Risk. Your home serves as collateral, so missing payments can put your property at risk.
For homeowners who are comfortable with these commitments and want a straightforward, lump-sum loan for renovations, a traditional home equity loan can be a good fit. But for those seeking more flexibility, there may be alternatives worth exploring.
What the Equity Sharing Home Loan Offers
An ESHL, like those offered by Unison, provides access to home equity in a slightly different way. Instead of a typical principal-and-interest structure, it’s an interest-only loan over a defined term (10 years), with a portion of the home’s future appreciation included in the final repayment. This structure helps create much lower monthly payments – often around half those of a traditional home equity loan – giving homeowners breathing room in their monthly budget while still funding significant renovation projects.
Here’s why the ESHL can be an appealing alternative for renovations:
- Lower monthly payments. Interest-only payments mean less financial strain month to month, freeing up cash for other expenses or savings while your renovations are underway.
- Flexibility. Homeowners can focus on the renovation itself without stretching their monthly budget to meet higher loan payments.
- No prepayment penalty. You retain the option to repay early, anytime it suits your financial plan.
- Equity sharing component. By sharing a portion of future home appreciation, the loan can offer below-market rates and reduced monthly costs compared to traditional loans.
While you’re still responsible for the loan repayment at the end of the term, including the shared appreciation portion, this unique structure allows for a level of financial flexibility that many homeowners find appealing when tackling large projects.
Which Option Might Make Sense for Your Renovation
An ESHL may be worth considering if:
- You want to fund a renovation but keep monthly payments lower.
- You’re looking for flexibility to balance other financial priorities.
- You’re comfortable sharing a portion of future home appreciation in exchange for lower payment pressure now.
- You want access to a substantial lump sum without stretching your monthly budget.
A traditional home equity loan may suit you if you prefer not to share in the appreciation of the value of your home and can afford to make steady payments with interest, every month. But if you need to prioritize short-term cash flow, and you’re comfortable with the long-term equity trade-off, an equity sharing home loan might be the answer. Ultimately, the right choice depends on your immediate goals, your renovation timeline, and your broader financial picture.
Bottom Line
Funding home improvements is about more than just the loan. It means creating a financial strategy that works for your life and your home. A traditional home equity loan offers predictability and simplicity, but it usually means higher monthly payments – now and for the entire life of the loans. An Equity Sharing Home Loan, on the other hand, can offer lower payments, greater flexibility, and a way to access significant funds without overburdening your budget, making it a compelling alternative for many renovation projects.
Before moving forward with either option, it’s wise to consider your long-term plans, review your budget, and consult a qualified financial advisor to determine the best path for your situation. If you're ready to explore how equity sharing can work for your family, start with a quick eligibility check or learn more at Unison.com.
Disclaimer: This content is provided for general informational and educational purposes only and is not intended to serve as financial, investment, legal, tax, or lending advice. The information presented may not apply to your specific situation, and actual outcomes can vary based on individual circumstances, market conditions, and applicable laws. Home equity sharing agreements and loans involve risks, including the potential loss of future home appreciation or other financial implications. Terms, availability, and eligibility for any products mentioned may differ by state, lender, or other factors. We strongly recommend consulting with a qualified financial advisor, attorney, or licensed professional before making any decisions or entering into agreements. Unison Mortgage Corp. is a licensed lender (NMLS ID 2574289); this article may include promotional content related to its services.