When it comes to accessing your home’s equity, you might be considering a Home Equity Agreement (HEA) or a Home Equity Line of Credit (HELOC). While they sound similar, these financial tools are fundamentally different. In this post, Sam Kwak, co-founder of Accelerated Strategies and a real estate investor with nearly a decade of experience, breaks down how each works, their key differences, and which might suit your needs. 

What Is a Home Equity Agreement (HEA)?

An HEA is not a loan but an agreement with a real estate investment company. Here’s how it works:

– The company provides you with cash (e.g., $50,000) in exchange for a percentage of your home’s value (typically 5-15%, say 10% for a $500,000 home).

– The company becomes a co-owner of your home, sharing in its future appreciation.

– There are no monthly payments or interest costs.

– When you sell or refinance, the HEA company gets their initial investment back ($50,000) plus a share of the home’s appreciation (e.g., 25% of any gain).

Example: If your $500,000 home appreciates to $700,000 (a $200,000 gain), the HEA company would receive 25% of the gain ($50,000) plus their original $50,000, totaling $100,000.

Think of it like selling a stake in a business: the HEA company buys a portion of your home’s “business” with a promise to share future profits.

What Is a Home Equity Line of Credit (HELOC)?

A HELOC is a loan, functioning like a credit card with a limit based on your home’s equity. Here’s how it works:

– If your home is worth $500,000 with a $300,000 mortgage, you have $200,000 in equity.

– Banks typically lend up to 90% combined loan-to-value (LTV), factoring in your existing mortgage. In this case, with a 60% LTV ($300,000/$500,000), a bank might offer a $150,000 HELOC.

– You can draw all or part of the $150,000 as needed, and interest accrues only on the amount you borrow, based on the average daily balance.

– HELOCs require monthly interest payments and can be paid back and borrowed again during the draw period (typically 5-10 years).

Key Differences Between HEA and HELOC

Both tools let you access your home’s equity as cash, but they differ in critical ways:

– Repayment: An HEA is repaid when you sell or refinance, with no monthly payments. A HELOC requires monthly interest payments.

– Flexibility: A HELOC allows you to borrow, repay and borrow again during the draw period. An HEA provides a lump sum with no option to borrow more.

– Cost Structure: An HEA involves sharing future appreciation, while a HELOC charges interest on the borrowed amount.

Which Is Better for Your Situation?

The best choice depends on your goals and financial situation. Here’s a breakdown of common use cases:

1. Home Renovations or Repairs

– Best Choice: HEA

– Why: An HEA provides cash without monthly payments, preserving your cash flow for other expenses or investments. If renovations increase your home’s value, both you and the HEA company benefit.

– HELOC Consideration: A HELOC works but requires monthly payments, which could strain your budget.

2. Paying Off High-Interest Debt

– Best Choice: HELOC

– Why: Consolidating high-interest debt (e.g., credit cards at 20-28%) with a HELOC (typically 6-9% interest) can save money and free up cash flow. Plus, a HELOC can be used strategically to pay off your mortgage faster (check out our webinar for details: acceleratedstrategies.com/free-virtual-class/).

– HEA Consideration: An HEA could work but may cost more if your home appreciates significantly.

3. Educational Expenses

– Best Choice: Either HEA or HELOC

– Why: As of early 2025, student loan rates (6.2-9%) are similar to HELOC rates, making either option viable. A HELOC requires immediate monthly payments, while an HEA defers repayment until you sell or refinance. If you haven’t saved separately for education, weigh the trade-offs of monthly payments versus future appreciation costs.

4. Cost-Benefit Analysis

The decision hinges on your home’s future appreciation:

– HEA: Costs more in high-appreciation markets. For example, with a $500,000 home and 5% annual appreciation over 10 years, the home’s value grows to $814,447. If the HEA company takes 25% of the $314,447 gain ($78,612) plus the original $50,000, you repay $128,612.

– HELOC: Borrowing $50,000 at 8% interest over 10 years (without principal payments) costs $57,946 in interest, totaling $107,946 repaid.

– Conclusion: In high-appreciation markets (e.g., 8% annually), an HEA could cost nearly double ($194,000+), making a HELOC the cheaper option.

HEA companies often target homes in high-appreciation areas, as their profit depends on future gains. If you receive an HEA offer, it’s a sign your home is likely to appreciate significantly.

Final Thoughts

Choosing between an HEA and a HELOC depends on your goals, cash flow needs and expectations for your home’s appreciation. An HEA offers flexibility with no monthly payments, ideal for renovations, while a HELOC provides lower long-term costs and is great for debt consolidation or mortgage payoff strategies. Run the numbers using our free calculator to make an informed decision.

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