Home equity agreements promise cash with “no monthly payments,” but they can be one of the most expensive, high‑risk ways to tap the cash in your house. When exploring this home financing option, compare it to more traditional options, such as a second mortgage or a home equity loan.
How do home equity agreements work?
A home equity agreement, sometimes called a home equity investment or contract, gives you a lump sum today in exchange for a share of your home’s future value. Instead of making monthly payments as you would on a second mortgage or home equity loan, you typically make one payment when you sell the home or refinance your home loans, or when the agreement expires. That’s most often between 10 and 30 years.
Companies market these products to make them sound appealing. However, you could find yourself worse off under certain conditions:
You may owe far more than the money received.
The company usually applies a “risk adjustment” that lowers the value of your home stated in the contract. That figure could be lower than the current market value. The company takes a percentage of your future appreciation based on that discounted amount. If your home rises in value, you may owe many times the funds you received upfront.
They are often costly compared to loans.
Independent analyses and consumer reports suggest that the effective annual cost of these contracts can reach the mid-teens or higher, with an equivalent interest rate of 14–22% in the early years. That’s well above typical mortgage and home equity loan rates. Because you don’t see a monthly rate, it’s easy to underestimate how much you're truly paying.
An unaffordable balloon payment would put you at foreclosure risk.
Most agreements require one large settlement payment at the end of the term or when you sell or refinance, not a gradual payoff like a loan. If you can’t come up with that lump sum—by selling, refinancing, or using savings, you may be forced to sell or face serious legal and financial consequences, as providers typically record a lien on the property.
Loss of future equity and flexibility.
You are effectively selling off a portion of your home’s future appreciation, which means you won’t benefit fully if values rise or if you stay long term in the residence. This can seriously limit your ability to build wealth through homeownership.
Complex, non‑standard contracts.
Terms vary widely by company: how your home is valued, what share of equity the lender takes, how buyouts are calculated, and what triggers repayment. The complexity makes it hard for you, someone accustomed to a mortgage or car loan, to compare offers or understand the actual cost.
Regulators and consumer‑protection organizations have concerns.
Consumer watchdogs have warned that these contracts echo the risky structures of the pre‑2008 housing era: mortgages with no monthly payments, large balloon payments, and loose underwriting practices. Some states have begun treating them as loans because of concerns about deceptive marketing and predatory practices.
Surprises at sale or refinance.
Homeowners report shock at how much they must repay, disputes over appraisals, and difficulty refinancing because the contract complicates title and underwriting. These surprises can derail your plans when you most need financial flexibility.
Which is better: an equity agreement, a second mortgage, or a home equity loan?
When you need to borrow against your home, financial institutions like Tropical Financial Credit Union can arrange a Home Equity Loan or a Home Equity Line of Credit, aka HELOC. With those or a second mortgage, you borrow a set amount or tap a credit line. You repay the sum, with interest, over a fixed period.
With a home equity loan or second mortgage, you:
Have fixed monthly payments. The HELOC rate rises and falls with the prime rate.
Know the interest rate, repayment schedule and total cost.
Pay a published, competitive rate below that on unsecured financing such as credit cards.
Pocket 100% of the appreciation gained during the years you owned the home.
Are more likely to qualify if you have good credit, can verify your income, and have equity above that on the first mortgage balance.
May be foreclosed upon if you miss payments, but only under well-established rules.
Are protected by long-standing mortgage and consumer credit regulations.
To be sure, second mortgages and home equity loans carry risks. Your home is still collateral, and you add another payment and closing costs. But their terms, fees, and protections are more transparent and standardized than those of most home equity agreements.
At Tropical Financial Credit Union, we believe homeowners deserve clear terms, predictable payments, and the ability to keep the full value of their home’s future growth.
When, if ever, does a home equity agreement make sense?
A home equity agreement might appeal if you have significant equity but can’t qualify for a traditional loan due to credit, income, or debt‑to‑income constraints. If you’re considering one:
Get independent legal and financial advice before signing.
Compare the total projected cost to a conservative second mortgage or home equity loan scenario, including closing costs.
Ask exactly how your home will be valued now and at payoff, and what happens if you can’t make the balloon payment.
Before committing to any non-traditional home equity product, speak with a trusted mortgage professional. Tropical Financial Credit Union can help you review your options and determine whether a Home Equity Loan, HELOC, or second mortgage is a better long-term solution for your goals.