What are Home Equity Sharing Companies?
Home equity sharing companies offer an innovative way to leverage your home’s equity without taking out a loan or making additional monthly payments.
If you can’t afford or qualify for a traditional home equity loan, this financing option may be a solution to quickly access cash for a life change or opportunity.
However, working with a home equity sharing company involves some risks that you’ll want to understand and weigh.
Editor’s note: This post is meant for educational purposes, not investment advice. If you need assistance navigating home equity sharing companies, HomeLight always encourages you to reach out to your own financial advisor.
What is home equity sharing?
Home equity sharing is a financial arrangement where a company invests in your home in exchange for a percentage of its future value. Instead of taking out a traditional loan, you partner with a company that provides you with a lump sum of cash. In return, the company shares in the appreciation (or depreciation) of your home’s value when you sell or refinance.
This alternative financing option is appealing because it doesn’t require monthly payments or accrue interest. It’s a way to unlock your home’s value while avoiding additional debt.
Depending on your situation, a home equity sharing agreement might also be an option to get cash for a down payment on a house. However, there are a number of factors to consider, and this path is not for everyone.
How does home equity sharing work?
Let’s look at an example of how a home equity sharing agreement might work. For clarity, we’ll use a $400,000 home value. This could be how much your paid-off home is worth, or how much equity stake you own in the property.
If an investment company buys a 20% stake in your home equity and your home is worth $400,000, it would give you a $80,000 lump sum.
Your home’s current value: $400,000
Amount of cash you need: $80,000
Investment company’s stake: 20%
Home equity sharing contract term: 10 years
Home’s annual appreciation rate: 3%
At the end of 10 years, the home appreciates to approximately $537,566. The homeowner will need to pay back the original investment ($80,000) plus the investor’s 20% stake in the home’s $137,566 appreciation amount ($27,513). In this case, the payback amount would be about $107,513.
Below is a table that shows the breakdown of this home equity sharing scenario, and what happens if, for some reason, the home depreciates in value — since it is an investment venture, after all.
If your home appreciates
If your home depreciates
Starting home value
$400,000
$400,000
Home value at repayment
$537,566
$380,000
Total increase/decrease
$137,566
-$20,000
Shared equity percentage
20% (for gain of $27,513)
N/A (loss of $20,000)
Original funding amount
$80,000
$80,000
Amount you owe the investor
$107,513
$60,000
What if your home depreciates in value?
A common question about home equity sharing companies is what happens if your home loses value. With home equity sharing, the company shares in both the appreciation and depreciation of your property.
If your home’s value decreases, the amount you owe the company will also decrease. As shown in the example above, if your home’s value drops from $400,000 to $380,000 and the company has a 20% equity share, it would receive $60,000 instead of the original $80,000.
