If you’re familiar with real estate terminology, chances are, you’ve heard of a home equity line of credit, more commonly known as a HELOC.
But there is another way to tap into your home equity that far fewer people are familiar with, and that’s a home equity agreement, or HEA.
So, what is an HEA? How does it work? And how do you know if it’s the right fit for you?
A recent article from realtor.com addressed common questions about home equity agreements, including:
- How does an HEA work? Similar to a HELOC, with a home equity agreement, you can borrow money against the equity of your home. But unlike a HELOC, HEAs don’t have monthly payments; instead, you agree to pay back the loan amount, plus a percentage of your home’s appreciation when you sell your property.
- What are the advantages? Many people are attracted to HEAs because they have a lower barrier to entry than HELOCs. While HELOCs generally require a credit score of 620 or above, lenders are often less strict with credit requirements on HEAs, so they can be a feasible way for people with less-than-perfect credit to borrow against the equity in their home.
- What are the drawbacks? The biggest drawback of HEAs is that you have to give up a percentage of your home’s appreciation when you sell, which can be up to 40 percent. In addition, if you don’t sell, you’ll still be on the hook to pay back the loan and the owed percentage at the end of the loan term, which is generally between 10 and 30 years. So, while you avoid monthly payments with HEAs, you could end up paying significantly more in the long run.