Guide to Home Equity Investment: Pros and Cons

SmartAsset maintains strict editorial integrity. It doesn’t provide legal, tax, accounting or financial advice and isn’t a financial planner, broker, lawyer or tax adviser. Consult with your own advisers for guidance. Opinions, analyses, reviews or recommendations expressed in this post are only the author’s and for informational purposes. This post may contain links from advertisers, and we may receive compensation for marketing their products or services or if users purchase products or services. | Marketing Disclosure

A home equity investment lets you access your home’s value without taking on new debt. It differs from traditional loans by offering cash with no interest charges or monthly payments. Homeowners typically repay the company when they sell the home or reach the end of the agreement. This can be an attractive option for unlocking equity without increasing debt, but there’s a lot to consider.

What Is a Home Equity Investment?

A home equity investment allows you to access the equity in your property without taking out a traditional loan. You partner with a company that gives you cash upfront in exchange for a share of your home’s future appreciation. When you sell, the company collects its agreed share. This includes their initial investment plus a percentage of any increase in your property’s value, typically around 25%–40%.

To qualify, homeowners generally need a certain amount of equity and a strong financial profile. The investment company often conducts an appraisal to determine the home’s current value and the amount of equity available. The agreement typically lasts between 10 and 30 years. During this time you can use the cash however you see fit, without accruing interest or making monthly payments.

Pros of a Home Equity Investment

It’s important to understand the potential pros and cons of a home equity investment before jumping into it. Here are five potential benefits:

1. Enjoy any appreciation of your home’s value: If your home’s value increases significantly, you’ll still benefit. This can be advantageous in rising real estate markets.
2. No monthly payments or interest rates: Unlike home equity loans or lines of credit, a home equity investment doesn’t require payments. You receive a lump sum of cash with no monthly or interest obligation.
3. Use the funds for any purpose: You can use the cash for any home improvements or major expenses. You have the flexibility to use the money where you need it most.
4. Potential for reduced financial strain: Since there are no monthly payments, home equity investments can ease financial pressure. This is especially beneficial for those with their net worth tied up in their home.
5. No risk of foreclosure due to missed payments: Unlike a home equity loan or line of credit, there is no risk of losing your home due to missed payments. However, it’s important to ensure you can meet the terms of the agreement when selling. The repayment amount could be large enough to complicate the sale.

Cons of a Home Equity Investment

With a home equity investment you’re giving away a part of your future profit from the real estate you own. It’s important to understand how much it may cost you. Here are four possible disadvantages associated with making a home equity investment:

1. Strict terms and conditions: Home equity investment agreements often include strict terms and conditions. The contract may require you to sell your home within a set timeframe or face penalties for early repayment.
2. Potentially high cost and fees: You may face significant costs and fees with a home equity investment. You might owe fees upfront for appraisals, closing and administration. In addition, the share of your home’s future appreciation given to the investor might be higher than the interest you would pay on a traditional loan.
3. Impact on future home sale profits: By entering into a home equity investment, you agree to share a portion of your home’s future value with the investor. This reduces the profit that will be earned from the sale. It may also make selling the home more challenging, depending on the terms of the agreement.
4. Less flexibility in the future: With a home equity investment, you’ve effectively exchanged a share of your home’s future value for upfront cash. That may also make it more challenging to pursue other financing options, such as refinancing or taking out a home equity loan, for additional needs.

Home Equity Investments vs. Traditional Financing

Unlike a home equity line of credit (HELOC) or home equity loan, home equity investments aren’t debt instruments. With traditional equity financing, you borrow against your home’s value and repay the principal plus interest through monthly payments. If you default, you risk foreclosure.

Home equity investments, however, involve selling a percentage of your future home appreciation. There’s no debt, no monthly payments and no interest. Instead, when you sell your home or when the agreement term ends, you pay the company their initial investment plus their share of appreciation.

While HELOCs offer flexibility with revolving credit and home equity loans provide lump sums at fixed interest rates, both increase your debt burden and monthly expenses. Home equity investments preserve your debt-to-income ratio and eliminate payment concerns, but potentially cost more in the long run if your property value increases significantly.

Who Should Consider a Home Equity Investment?

Home equity investments work best for homeowners with substantial equity who need cash without increasing monthly obligations. They’re particularly suitable for retirees on fixed incomes who want to age in place while accessing home wealth, or homeowners facing temporary financial challenges who need breathing room without monthly payments.

Many homeowners also find these investments appealing when they need funds for major expenses like home renovations, education costs or medical bills, but want to avoid high-interest debt. Homeowners in appreciating markets who are comfortable sharing future gains may find the trade-off worthwhile.

However, they’re less ideal for those planning to sell soon or who can easily qualify for low-interest traditional financing. The ideal candidate plans to stay long-term, needs upfront capital without added payments and understands the trade-offs versus traditional borrowing.

Bottom Line

A home equity investment offers a unique way to tap into the value of your home without taking on additional debt. You access funds upfront through this arrangement without monthly payments or interest. However, consider the costs and potential impact on your future home sale profits before getting started.

Tips for Investing in Real Estate

• Real estate can be a powerful wealth-building tool, but it also ties up capital and adds complexity. A financial advisor can help you assess how a property fits into your long-term strategy, especially if you’re balancing it with retirement savings, tax planning or other investments. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Before buying a property, run the numbers using SmartAsset’s real estate calculators. Tools like the rent vs. buy calculator, mortgage calculator and property tax estimator can help you evaluate affordability, financing costs, and potential returns. These insights can guide smarter investment decisions and help you compare multiple properties more effectively.

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How Much of Your Monthly Income Should Go to a Mortgage?

Edited by Jeff White, CEPF®

Published on July 30, 2025, 7:43pm ET

|Fact Checked

SmartAsset maintains strict editorial integrity. It doesn’t provide legal, tax, accounting or financial advice and isn’t a financial planner, broker, lawyer or tax adviser. Consult with your own advisers for guidance. Opinions, analyses, reviews or recommendations expressed in this post are only the author’s and for informational purposes. This post may contain links from advertisers, and we may receive compensation for marketing their products or services or if users purchase products or services. | Marketing Disclosure

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How much of your monthly income should go to a mortgage? It depends on factors like debt, income stability, and local housing costs. A common guideline analysts recommend is the 28% rule. This strategy suggests spending no more than 28% of your gross monthly income on housing expenses. However, this benchmark can vary based on your financial situation, down payment size and the type of loan you choose.

A financial advisor can help you determine how much you can afford to spend on a home and how your mortgage impacts your broader financial plan.

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Understanding the 28/36 Rule

The 28/36 rule is a commonly used guideline for allocating income toward housing and debt. The “28” refers to the maximum percentage of your gross monthly income that should be spent on housing. This includes your mortgage payment, property taxes, homeowners insurance, and possibly HOA fees. This portion is known as the front-end ratio.

For example, if your gross monthly income is $7,000, the 28% rule suggests that your total housing costs should not exceed $1,960. That figure includes everything tied to the cost of owning the home, not just the mortgage itself.

The second number, 36, refers to your back-end ratio. This includes all monthly debt payments—credit cards, student loans, car loans and housing costs combined. If your total monthly debt exceeds 36% of your gross income, lenders may see you as a higher risk. It won’t matter if your housing costs fall under the 28% mark.

How Lenders Decide How Much You Can Borrow

Lenders often use this ratio when determining how much home you can afford. If your projected housing expenses cross the 28% threshold, you may find it harder to qualify for a conventional loan. You’ll likely need a larger down payment or strong credit to close the deal. While not a hard rule, the 28% guideline helps borrowers assess whether a mortgage payment is likely to fit within their existing income and budget.

Alternative Strategies for Setting a Mortgage Budget

Beyond the 28/36 rule, several other fixed-percentage strategies offer alternative ways to think about mortgage affordability. These rules can reflect different financial strategies or respond to changing interest rate environments and local housing markets.

One is the 25% after-tax rule. This strategy recommends keeping your mortgage payment at or below 25% of your net (take-home) monthly income. This approach accounts for taxes and deductions already taken from your paycheck, offering a more conservative limit. It leaves more room for savings, discretionary spending, or unexpected expenses.

Another is the 30% of gross income rule, sometimes used as a benchmark for overall housing costs, particularly in urban markets with higher property values. While slightly looser than the 28% front-end ratio, it provides a simple, rounded figure that some households use for budgeting.

A less common method is the 35% rule, which some lenders apply when evaluating high-income borrowers with minimal debt. This rule assumes more disposable income is available, allowing for a higher housing cost allocation without straining other parts of the budget.

Some people take this a step further by using a percentage of net income instead. While gross income is commonly used by lenders, budgeting based on take-home pay—such as limiting housing costs to 30% of net income—can provide a more accurate sense of what’s manageable day to day.

Gross Income vs. Net Income: Which Should You Use?

Using gross income allows for easy comparison with standard rules like the 28/36 guideline, but it doesn’t reflect how much money you actually take home each month. Instead, it includes your total earnings before taxes, retirement contributions and other deductions.

Net income, on the other hand, represents your actual monthly cash flow after deductions. Budgeting based on net income can offer a more realistic view of what you can afford without stretching yourself thin. For example, if your gross income is $7,000 but your net income is $5,200, then allocating 30% of net income to housing expenses would cap your budget at $1,560—much less than the $1,960 limit suggested by the 28% rule.

Using net income may lead to a more conservative housing budget. It can also help account for other financial goals, such as savings, debt repayment or discretionary spending.

What Does it Mean to Be Cost-Burdened?

Analysts consider a household cost-burdened when it spends more than 30% of its gross income on housing. This threshold, defined by the U.S. Department of Housing and Urban Development (HUD), includes all housing costs—mortgage payments, property taxes, insurance and utilities. Once housing expenses exceed this level, it gets harder to cover basics like food, healthcare, transportation or savings.

Severe cost burden occurs when housing consumes more than 50% of gross income. In these cases, households may be more vulnerable to financial stress, even if their income is relatively high. Being cost-burdened doesn’t necessarily mean someone can’t pay their mortgage, but it does suggest that their budget may lack flexibility.

Buyers in high-cost areas or those with variable income may face a higher risk of exceeding the 30% threshold, especially if they underestimate future expenses such as rising property taxes, maintenance costs, or inflation.

Bottom Line

Mortgage affordability isn’t a one-size-fits-all calculation. While general rules offer useful benchmarks, personal income, spending habits, and debt levels often tell a more complete story. Weighing different methods—whether based on gross income, net income, or fixed percentages—can help shape a housing budget that fits comfortably within the context of your broader financial life.

Tips for Financial Planning

• A financial advisor can help you understand how your largest assets fit into your greater financial picture. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Looking for help with your own investment portfolio? Consider estimating how your portfolio could grow over time with an investment calculator.

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