A home equity agreement is a contract in which an investment company pays you a lump sum today in exchange for a percentage of your home’s future value, settled years later when you sell, buy the investor out, or reach the end of the term. There are no monthly payments and no stated interest rate, because it is not a loan. That framing is what makes the product attractive, and it is also what makes it expensive: the Consumer Financial Protection Bureau found the effective cost runs roughly 19.5 to 22 percent per year in the early years, higher than most home-secured credit.
How the Deal Is Structured
The mechanics look simple on the surface and get more complicated when you read the contract. In exchange for cash upfront, the investor takes a percentage stake in your home and records a lien against your title with the county. You keep living in the house and keep the title in your name. The agreement runs for a set term, typically 10 to 30 years.
Most providers do not trade dollar-for-dollar in your equity. They use a multiplier. Cash equal to 10 percent of the home’s value might buy the investor a 20 percent stake in the home’s future value, a 2x multiple. Under that math, the investor doubles its money before any appreciation is counted, and the home would have to lose more than half its value before the investor took a loss.
Some contracts add a second layer by discounting the starting value of the home. A house that appraises at $400,000 might be entered into the agreement at a starting value of $300,000, a 25 percent discount. At settlement, appreciation is measured from that lower baseline up to the full undiscounted market value at the time. The investor captures the gap even if the market never moved.
Rate caps sometimes appear in these contracts, marketed as “homeowner protection caps” or “safety caps.” They generally sit around 18 to 20 percent compounded monthly, which annualizes to the same 19.5 to 22 percent range the CFPB flagged. The cap trims the investor’s upside in a very hot market; it does not make the contract inexpensive.
What It Actually Costs
Because there is no interest rate on the page, the true cost is only visible when you run the settlement math. The CFPB’s analysis walked through a homeowner who receives $50,000 upfront: after just three years, that homeowner would owe between $68,045 and $71,538, depending on whether the home appreciated or depreciated. Even at an average 1 percent annual depreciation, the settlement still ran about $18,000 above the original payout.
The CFPB described the effective rate as substantially higher than most home-secured credit, though below typical credit card rates. Extended across a full 10- or 30-year term, the compounding matters.
Upfront fees come out of your payout, so the cash you actually receive is less than the headline amount. Processing fees charged by HEA companies typically run 3 to 5 percent of the initial payment; on an $80,000 deal, that is $2,400 to $4,000. Third-party charges for the appraisal, title work, and county recording add several hundred to over a thousand dollars more.
Who Can Qualify
Qualifying for an HEA is easier than qualifying for a HELOC or home equity loan in some ways, harder in others. The property itself gets more scrutiny than you might expect.
- Equity: at least 20 percent remaining after the agreement closes, with some providers setting the bar at 25 percent.
- Credit score: some providers accept scores as low as 500 to 585, compared with 620 or higher at a traditional lender.
- Income: many providers set no formal income requirement, because there is no monthly payment.
- Property type: usually limited to single-family homes, townhomes, and certain condominiums. Multi-family and manufactured homes are often excluded.
- Occupancy: typically must be your primary residence, though some investors will consider second homes or investment properties on stricter terms.
- Location: investors favor markets with stable or appreciating values. A home in a declining market can be turned down regardless of your personal finances.
What You Owe During the Term
Signing does not put the agreement on autopilot. You are contractually required to keep the existing mortgage current, pay property taxes on time, maintain adequate homeowners insurance, and keep the property in reasonable condition. Falling behind on any of these can trigger consequences, including acceleration of the settlement.
You also cannot freely add new liens against the property. Anything that touches the investor’s secured position, taking out a second mortgage, demolishing a structure, converting the use of the property, typically needs to be checked against the agreement first.
How the Agreement Ends
Settlement is triggered by a specific event. The most common is selling the home, in which case the investor’s share comes out of the sale proceeds through escrow. Other triggers include the end of the contract term and the homeowner’s death.
If the term expires and you want to stay, you owe the full settlement amount out of pocket. That usually means liquidating savings, refinancing, or borrowing enough to cover the investor’s share. Homeowners who cannot pay may be forced to sell, or in some cases face foreclosure on the investor’s lien.
You can also buy the investor out voluntarily before the term is up. That involves a fresh appraisal, applying the contract’s formula to the new value, and paying through escrow so the lien is released. Because the multiplier and any appreciation still apply, an early buyout rarely costs anything close to what you originally received.
Death is typically listed as a triggering event too. The estate or the heirs must settle the investor’s share within the timeframe the contract specifies. Heirs who want to keep the house have to pay off the investor, usually with their own financing or estate funds. If they cannot, the home may have to be sold so the investor collects from the proceeds.
Refinancing and Future Borrowing
The lien recorded by the HEA company does not vanish when you want to refinance your primary mortgage. A new lender will see the investor’s claim and may refuse to proceed unless the HEA company agrees to subordinate its lien, letting the new mortgage take priority.
Not every HEA company will subordinate, and those that do may attach conditions or fees. If there is any chance you will want to refinance during the term, ask about the provider’s subordination policy before you sign. Being locked out of a refinance during a period of falling rates can cost more than the HEA itself.
Tax Treatment
An HEA does not slot into the mortgage tax rules. Because it is not a loan, there is no interest, and no mortgage interest deduction. The fees you pay at settlement are not classified as interest either.
At settlement, the tax consequences generally involve capital gains. If you sell the home, the investor’s share reduces what you net, which changes the gain you report. The federal home sale exclusion, up to $250,000 for single filers and $500,000 for married couples filing jointly, still applies if you meet the ownership and use tests, and many homeowners will owe no capital gains tax on the sale. The share paid to the investor is money that would otherwise have been yours, and how it is treated on your return depends on how the agreement is structured.
If the sale generates a Form 1099-S, the reported figure is the full sale price, not what you netted after the investor was paid. A tax preparer who understands the HEA structure is worth the call, so the gain is calculated correctly.
The Consumer Protection Gap
This is the part of an HEA that deserves the most attention. Because these contracts are structured as equity investments rather than loans, they can fall outside the federal consumer protection laws that govern mortgages. The CFPB has warned that HEA companies “may not provide standard disclosures or comply with laws protecting consumers when taking out a mortgage.” Truth in Lending disclosures, standardized closing documents, and the error-resolution procedures you get with a HELOC may not apply.
The standard federal three-day rescission right on mortgage refinances also may not automatically apply, since HEAs are generally not classified as loans. Most contracts include some rescission window, but the length varies by provider and by state.
A handful of states, including Maryland, Connecticut, and Illinois, have enacted or proposed rules specifically covering these agreements. Most states have no dedicated framework. That puts the burden on you to read every word of the contract, and to pay close attention to the multiplier, the starting home value and any discount, the rate cap, the triggering events, the homeowner obligation provisions, and how disputes over the final home valuation are resolved.
How It Compares to Other Ways to Tap Equity
The appeal of an HEA is real. No monthly payment, no income verification, and qualification with a lower credit score. The tradeoff is a long-run cost that most homeowners underestimate.
- Home equity loan: a fixed-rate second mortgage with predictable monthly payments and a set repayment schedule. Typically requires a credit score around 620 or higher and enough income to qualify. Interest may be deductible if the funds are used for home improvements. The total cost is knowable from day one.
- HELOC: a revolving line of credit secured by your home, with a variable interest rate and required monthly payments. More flexible than a lump-sum loan, and generally the least expensive option for homeowners who qualify.
- Cash-out refinance: replaces the current mortgage with a larger one and pays you the difference. Resets the mortgage term and rate, so it mostly makes sense when current rates are favorable. Requires strong credit and income documentation.
- Reverse mortgage: available to homeowners 62 and older. Converts equity to cash with no monthly payments, though the balance grows over time. Heavily regulated under federal rules, with mandatory counseling.
An HEA fits a specific situation: significant equity, limited income or damaged credit, and no path to a conventional product. For anyone who can qualify for a HELOC or home equity loan, the math almost always favors those options. The CFPB’s 19.5 to 22 percent effective cost figure is the number to hold in mind when comparing.