New Way to Tap into Home Equity Appears! September 8, 2008Posted by shaferfinancial in Uncategorized.
Tags: home equity, immediate annuity, real estate for retirees, Retirement, reverse mortgage
Never say the financial markets are not inventive! Now there are three companies (REX andCo., Equity Key and Grander Financial) that will give you some of your home equity in exchange for a piece of the future appreciation. Of course, you need to have significant home equity to make the deal, and the percentage they are willing to forward to you is pretty small. But in exchange for cash now, you give up 1/3 or 1/2 of your future appreciation. I suppose they are filling a niche of folks who want to stay in their homes, yet don’t have the credit scores or enough income to get a traditional loan. And of course they are competing against reverse mortgages; that shouldn’t be hard. Regular readers know that I dislike reverse mortgages for the fees and the compounding interest which eats up home equity fast. Here, at least, you can share in future appreciation as well as share the risk for any depreciation of value. For those of you curious here is a web site for REX and Co. http://www.rexagreement.com/index.php/
But, why this product? Well, it is the result of poor financial advice being handed out by financial planners. For years, the financial service industry (banks, financial planners, etc.) has pushed the idea of paying off your mortgage so you enter retirement with no mortgage. The result of following this advice is millions of people with paid off homes and little retirement savings. As inflation eats away at their savings and health care costs escalate retirees find themselves caught between a rock and a hard place.
Banks pushed reverse mortgages at these folks as a way to remain in their home and suck the equity out of it. Now beyond the obvious predatory nature of reverse mortgages, hidden from view, is the reality that these folks would be much better off having more retirement income with a mortgage, than little income without a mortgage. Too late for these folks. Now I have written before that people that find themselves in this position are much better off selling the home, buying an immediate annuity and renting a nice apartment. Their expenses go down, they get additional retirement income for life, and live in a much more manageable place.
For those folks still working, pay attention. If you don’t have a mortgage or are trying hard to pay it off, stop. Get out that equity now, and put it to work for you before you have to give up all that equity to a bank in a reverse mortgage or give up a chunk of the future appreciation in these new products (why own a home if you are not benefitting from the appreciation?). If you have a couple of million dollars to get you through your retirement, then you can afford to have a paid off home, if not you can’t. Consider selling the home if the market is OK and you are on the verge of retirement with moderate amounts of wealth. Renting is really not a bad experience for seniors. Many real estate investors would love to have a nice stable senior couple rent their property and would bend over backwords to make it a great experience. I know many of these folks!