Differences Between Home Equity Loans vs. Equity Sharing Agreements vs. Second Mortgages
When you're ready to access the equity in your home, you have three primary options: home equity loan, equity sharing agreement, or second mortgage. Each option has its own set of pros and cons, so it's important to understand the key differences before making a decision.
A home equity loan allows you to borrow a lump sum of money against the equity in your home. You'll typically need to provide proof of income and employment, as well as go through a credit check. Once approved, you'll receive the funds in one lump sum and make fixed monthly payments, plus interest, until the loan is paid off.
An equity sharing agreement is a contract between you and another party, typically an investor, in which you agree to share the equity in your home. The investor provides a lump sum of money upfront, and in return, they receive a percentage of the home's appreciation when it's sold. These agreements are often used by people who are unable to qualify for a home equity loan or don't want to take on the risk of a second mortgage.
A second mortgage is a loan that's secured by the equity in your home, just like a home equity loan. The key difference is that a second mortgage is taken out after your first mortgage, so it's riskier for the lender. As a result, you'll likely need to pay a higher interest rate and may have to provide additional collateral, such as a car or investment property.
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