Tapping home equity for no-debt cash

(Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern@aol.com.)

By Linda Stern

WASHINGTON (Reuters) - Like most long-time homeowners, Dan and Jody Dollar have built up quite a lot of equity in their Newbury Park, California, home.

They've lived in the house for 24 years, come close to paying off the mortgage, and watched its value go up from $160,000 to almost $700,000. That was equity they wanted to tap to pay off the family cars and buy some new equipment for Dan's physical therapy practice. But they didn't want to get into a costly reverse mortgage.

Instead, the Dollars signed up for a relatively new product called a Rex Agreement.

It gave them $117,000 in cash to spend however they wanted, and they owe no payments until they sell the house. At that time, they'll owe Rex & Co. the $117,000 plus half of the appreciation in their home's worth between the time they signed the agreement and the time they sell the house. If the house goes down in value, Rex & Co. will eat half of that loss as well. Since they signed the agreement last October, prices in their neighborhood have dropped. So far, it's been a good deal for the Dollars (yes, that's their real name.)

Rex (rexagreement.com) is the first of several new products on the market aimed at this shared equity or shared appreciation concept. Others are Equity Key (equitykey.com) and My Equity Freedom (granderfinancial.com).

They all have differences in the way they are structured, but all aim to replace interest payments (and high reverse mortgage costs) with an unknown share of future profits. It's a risk for the issuers, but homeowners who enter these agreements have risks, too.

For starters, the timing of these deals might be bad for homeowners. Home prices have been falling by historically high percentages in the last two years, and many economists are predicting inflationary times ahead. That could signal another round of increases in home prices. Mortgage rates remain near historic lows. So homeowners entering these deals might be establishing a low baseline for their home's value and giving up sizable increases in future equity just to avoid locking in a low interest rate now.