Key Takeaways
- Home equity investments (HEIs) provide cash in exchange for a share of your home’s future value, with no monthly payments required.
- Home equity loans are traditional debt with fixed interest rates and predictable monthly payments.
- HEIs work best for homeowners with limited cash flow or lower credit scores who cannot qualify for conventional financing.
- Home equity loans are typically better for borrowers with steady income and good credit who want to retain all their home’s appreciation.
Explore your home equity options. Start here
If you want to access your home equity, you may be deciding between a traditional home equity loan and a newer option, like a home equity investment loan (HEI). The main difference is whether you prefer to pay interest on a loan or share a portion of your home’s future value.
Both options convert your equity into cash, but they work very differently and involve unique risks. This guide explains how each product works, their costs, qualification criteria, and how to determine which is best for you.
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What is a home equity investment (HEI)?
A home equity investment (HEI) provides cash today in exchange for a share of your home’s future value. Instead of borrowing money and making monthly payments, you receive a lump sum and agree to settle the investment later when you sell the home, refinance, or reach the end of the contract term.
Because HEIs do not charge traditional interest or require regular payments, they appeal to homeowners who want access to equity without adding a monthly obligation. However, the trade-off is that the provider receives a portion of your home’s future value, which can become expensive if property prices rise significantly.
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What does HEI stand for?
HEI stands for home equity investment. You may also see the terms home equity agreement (HEA) or shared equity agreement used interchangeably. Each describes the same structure: a homeowner receives cash in exchange for giving an investor a contractual share of the home’s future value. Although the names vary across providers, the underlying arrangement remains the same.
How does an HEI work?
An HEI begins with an application and home valuation from the provider. If approved, you receive a lump-sum payment based on a percentage of your home’s current value, often between about 10% and 30%, depending on the provider, your existing mortgage balance, and your equity position. In return, the provider receives the right to a portion of your home’s future value when the agreement ends.
Some contracts calculate this share solely based on the appreciation in your home’s value, while others base it on a percentage of the total value at settlement, making careful review of the contract terms important.
How does HEI repayment work?
HEI repayment happens through a settlement event rather than monthly payments. Most agreements end when you sell your home, refinance your mortgage, or reach the end of the contract term, which commonly ranges from 10 to 30 years. At that point, the amount owed depends on the home’s value at settlement. If the property has appreciated significantly, the provider’s share will be larger. If the value has remained stable or declined, the settlement amount will generally be lower.
What is a home equity loan?
A home equity loan allows you to borrow against the value of your home through a second mortgage. You receive a lump sum at a fixed interest rate and repay it through regular monthly payments over a set period, typically 5 to 30 years. Because your home serves as collateral, interest rates are typically lower than unsecured borrowing options such as personal loans or credit cards. Unlike an HEI, a home equity loan does not give away any portion of your home’s future appreciation.
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How do home equity loans work?
With a home equity loan, the lender issues the full loan amount at closing in one payment. The interest rate remains fixed throughout the loan term, so the monthly payment stays consistent from the first to the last payment.
Lenders usually allow homeowners to borrow up to about 80% to 85% of the home’s value when combining the primary mortgage and the new loan. This combined amount is known as the combined loan-to-value ratio, or CLTV.
What are home equity loan repayment terms?
Home equity loans follow a predictable repayment structure. Borrowers make fixed monthly payments that include both principal and interest until the loan balance is paid in full. Because the interest rate and payment schedule are established upfront, you can estimate the total interest cost before taking the loan.
Unlike an HEI, the amount you repay does not depend on how your home’s value changes over time. You simply repay the amount borrowed plus interest according to the agreed schedule.
Home equity loan vs HEI comparison
| Feature | Home equity loan | HEI |
| Payment structure | Fixed monthly payments | No monthly payments |
| Cost basis | Interest on loan balance | Share of home appreciation |
| Credit requirements | Higher scores typically required | More flexible |
| Income verification | Required | Less stringent |
| Home appreciation | You keep 100% | Shared with investor |
| Foreclosure risk | Yes, if payments are missed | No, it’s not debt |
| Best for | Steady income, good credit | Cash-flow constraints, lower credit |
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Qualification requirements for HEI loans and home equity loans
The qualification process differs significantly between home equity loans and HEIs because the products are structured so differently.
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Home equity loan requirements
To qualify for a home equity loan, lenders typically require:
- Minimum equity: At least 15% to 20% equity in your home
- Credit score: Usually 620 or higher, with better rates for scores above 700
- Debt-to-income ratio: Generally 43% or lower
- Income verification: Pay stubs, tax returns, and employment verification
- Home appraisal: To confirm your home’s current market value
HEI qualification requirements
HEI providers mainly consider your home’s value and equity, with less emphasis on personal finances. Credit score requirements are often more flexible, sometimes accepting scores in the 500s. Income verification is less strict, and some providers do not require it.
However, property eligibility varies. Some HEI providers operate only in specific states or exclude certain property types, such as manufactured homes or condominiums.
Pros and cons of home equity loans
| Pros | Cons |
| Keep 100% of home appreciation | Monthly payment obligation |
| Fixed, predictable payments | Risk of foreclosure if payments are missed |
| Lower total cost if home appreciates significantly | Stricter qualification requirements |
| Interest may be tax deductible for home improvements | Adds to monthly debt burden |
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HEI loan pros and cons
| Pros | Cons |
| No monthly payments | Forfeit portion of home appreciation |
| Flexible credit and income requirements | Potentially high total cost if home value rises |
| Not traditional debt | Balloon-style settlement at end of term |
| Easier qualification for cash-strapped borrowers | Limited provider options compared to lenders |
Home equity loan vs HEI: Which costs more over time?
The cost depends largely on your home’s appreciation. A home equity loan has a fixed, predictable cost based on interest paid over the loan term. An HEI’s cost is uncertain until settlement, as it depends on your home’s future value.
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Home equity loan interest vs HEI appreciation sharing
With a home equity loan, you can calculate your total interest cost before you sign. For example, if you borrow $50,000 at 8% for 15 years, you’ll pay roughly $36,000 in interest over the life of the loan.
With an HEI, you might receive $50,000 in exchange for 15% of your home’s future appreciation. If your home increases in value by $200,000 over that time, you’d owe $50,000 plus $30,000 in shared appreciation, for a total of $80,000.
Example cost comparison at different appreciation rates
Let’s say a homeowner needs $50,000. Here’s how the costs might compare:
- High appreciation scenario: The home gains $200,000 in value. The home equity loan costs roughly $36,000 in interest. The HEI costs $30,000 or more in shared appreciation, potentially making the loan cheaper overall.
- Low appreciation scenario: The home gains only $50,000. The loan still costs $36,000 in interest. The HEI costs just $7,500 in shared appreciation, making the HEI significantly cheaper.
If your home appreciates less, an HEI may be more cost-effective. If it appreciates more, a traditional loan may offer greater savings.
When is a home equity loan the better choice?
A home equity loan is often preferable if you have a steady income and can manage an additional monthly payment. It is also advantageous if you have good credit and qualify for a competitive interest rate. If you anticipate significant appreciation in your home’s value, a loan allows you to retain all future gains. Additionally, you benefit from knowing the exact borrowing cost upfront.
When does an HEI make more sense?
An HEI may be more suitable if you have limited or irregular cash flow and cannot take on a new monthly payment, especially compared to options like HELOCs that require monthly payments.
An HEI may also be appropriate if your credit score would disqualify you from a traditional home equity loan or result in a high interest rate.
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Homeowners planning to sell in the near future may find an HEI appealing, particularly in markets with modest appreciation. However, the settlement amount can be substantial if your home’s value increases more than anticipated.
Risks to consider before choosing between a home equity loan and an HEI
Both options involve your home as collateral, so the financial stakes are significant.
Home equity loan risks
The primary risk is foreclosure if you miss payments, as the lender can claim your home. Taking on additional monthly debt may strain your budget if your income changes. If home values decline, you could owe more than your home is worth.
HEI risks
The main risk is a large settlement amount if your home appreciates significantly, which could result in owing much more than you received. You will also retain less equity upon sale, as a portion goes to the investor. The required settlement at the end of the term may force you to sell or refinance, even if the timing is not ideal.
How to decide between a home equity loan and an HEI
Choosing between a home equity loan and a home equity investment usually comes down to your monthly budget, credit profile, and expectations for your home’s future value. If you can comfortably manage a fixed monthly payment, a home equity loan often costs less over time because you keep all of your home’s future appreciation. If adding another payment would strain your budget, an HEI may offer flexibility, as it does not require monthly repayments.
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- Start by reviewing your monthly cash flow to determine whether you can comfortably handle a fixed loan payment.
- Check your credit profile, since stronger credit usually leads to better home equity loan terms, while weaker credit may make an HEI easier to obtain.
- Consider your local housing market and whether you expect significant home appreciation, which could make sharing equity more expensive.
- Compare real offers from lenders and HEI providers to evaluate the actual costs and terms based on your situation.
Find the right home equity option for your situation
The best choice depends on your individual financial situation, long-term goals, and comfort with risk. Neither option is universally better. What matters is which one fits your circumstances. Consider exploring all types of home equity loans available to find your best fit.
FAQs about home equity loans vs HEI
Most HEI contracts include some form of downside protection, meaning the investor may share in the loss if your home’s value declines. However, the specific terms vary significantly by provider, so review the contract carefully before signing.
Yes, home equity investments are legitimate financial products offered by regulated companies like Hometap, Unison, and Point. It’s still essential to research providers carefully and understand all contract terms before committing.
Most HEI agreements allow early settlement through a sale, refinance, or direct buyout. Some providers have minimum holding periods or charge early termination fees, so ask about early payoff terms upfront.
The interest on a home equity loan may be tax-deductible if the funds are used to buy, build, or substantially improve the home securing the loan. Consult a tax professional for advice on your specific situation.
You can sell your home at any time with an HEI in place. The settlement amount owed to the investor is simply paid out of the sale proceeds at closing.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.