Tapping the Future Value of Your Home

Some retirees leverage home appreciation in advance.

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Senior homeowners sometimes need to tap the value of their house to pay sudden expenses. Most ways to access home equity involve taking on debt. But several financial institutions offer a new alternative to often pricy reverse mortgages or other home loans.

EquityKey, a San Diego company that is a division of Belgium-based KBC Bank, will provide a cash advance on a house in exchange for the right to share in the home's future appreciation. Single property owners ages 65 to 85 can receive 10 to 15 percent of the value of their property in exchange for a 50 percent stake in the home's future value. Two homeowners can collect up to 30 percent of their home's value, but then EquityKey receives 100 percent of the property's appreciation. Clients keep their existing equity and don't take on debt.

Here's how to decide if leveraging your home's future appreciation is right for you.

Get to know the terms. EquityKey cofounder Jeff Nash gives an example of a house worth $1 million. The company will pay the property owner between $100,000 and $150,000 in cash to partner in the growth of the property. If that house grows to be worth $3 million in 20 years, $1 million of the appreciation will belong to EquityKey and the other $1 million to the owner. If the client passes away within 10 years of signing the agreement, EquityKey would use a life insurance policy it purchased on the homeowner to buy the home for $2 million. (The company can then sell the house for $3 million.) Should the heirs desire to keep it, EquityKey offers the right of first refusal to the family, Nash says. But they essentially would have to buy the $1 million share of the house EquityKey owns.

Gladys Tully, 72, got $106,000 from EquityKey in exchange for a 50 percent stake in the appreciation of her home in El Cajon, Calif. Tully, who sold her travel agency in 1994 and retired, used the money to pay down part of the principal of her mortgage and remodel her bedroom and bathroom, without giving up her passions: painting, the large garden and orchard on her property, and a hiking trip to Europe every year. "I'm able to continue the lifestyle that I want to live," Tully says.

Don't move. If you plan to move soon after entering the agreement, you'll have to pay back the money and may incur fees. Those who sell within 10 years must pay back the entire amount; if they sell within five years of the deal, they must pay an additional 5 percent. But otherwise, the cash leveraged is not a loan and does not need to be paid back. And unlike a reverse mortgage, there is no requirement that the homeowner live in the property, so commercial properties are eligible as well.

Location matters. You may be wondering who would bet on home appreciation right now when home values are famously falling. "We try to target states where we can do a little bit better," says Nash. EquityKey real estate options are currently available for properties in Arizona, California, Connecticut, Florida, Massachusetts, New Jersey, New York, Oregon, and, for commercial properties only, Texas. The company plans to expand into Illinois, Maryland, Virginia, Washington state, and the District of Columbia this year. And EquityKey takes on only clients it deems to be insurable and who pass a credit check.

Shop around. Two other companies, REX & Co. and Grander Financial, also will pay you up to 10 to 15 percent of your home's value for a stake in the future appreciation. They differ from EquityKey in that they impose no age limitations and require that the primary owner reside in the property. REX & Co. pays customers in two payments, one when the agreement is entered and one at the end of the agreement, typically when the home is sold. In some cases, homeowners may be required to repay if the home loses value.

Read the fine print. As with all financial transactions, experts advise caution. "We would not advise taking on a reverse mortgage or shared appreciation for something that is not a necessity," says Gail Hillebrand, a senior attorney for the nonprofit Consumers Union. "For any kind of an arrangement involving your house, you need to look at the total cost and the total return. Find out if the future appreciation is forever or for some limited period of time and exactly what fees are charged." A lawyer and an independent financial adviser can help you parse the terms of your individual agreement.