A Few Innovative Alternatives to Reverse Mortgages
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As the march of baby boomers into retirement continues, the race is on in the financial industry to find innovative and cost-effective ways to unlock the enormous store of retirees’ home equity wealth in a way that doesn’t require regular loan payments. Estimates place the value of seniors’ home equity wealth at $3-$5 trillion and growing, so stakes are very high.
Reverse mortgages, in their many manifestations (HECM 1xx, Jumbo, HomeKeeper, etc., etc.), are the leading product at this point. They’ve been around for nearly twenty years now, are rapidly growing in popularity, but suffer somewhat from an image problem.
The Achilles heel of today’s reverse mortgage products is high costs - both upfront costs and ongoing carrying costs. The high costs are brought down the longer the borrower is able to remain in the home and avoid terminating the loan. But, according to HUD, more than half of HECM reverse mortgage borrowers terminate the loan within seven years meaning they likely paid a steep price (in terms of the TALC rate) for the privilege of borrowing against their own equity.
A few alternatives to reverse mortgages have been launched in the last several months that compete largely on the basis of being a “lower cost” option. Each product has its own shortcomings but still may provide a good alternative to a reverse mortgage for someone in the right situation. Following is a brief summary of each including a link to where more information can be found:
| Alternatives to Reverse Mortgages | |||
|---|---|---|---|
| Link | Name | Description | Main Drawbck |
 |
Family Advantage (1-800-805-2472) |
Family Advantage is a secured line of credit funded by the relatives or friends of a homeowner, in any amount - small to large. Family Advantage enables the homeowner to receive cash borrowed against home equity, knowing that a relative or friend – not an institution – is building equity in the home. Family Advantage is a comparable but less expensive alternative to a traditional reverse mortgage. | Obviously this type of arrangement hinges upon having a family member or other acquaintance with adequate resources able and willing to fund the loan. |
 |
Equity Key (877-234-4635) |
If you are over the age of 65, the EquityKey program gives you the opportunity to receive debt-free cash without risking any of the existing equity in your home. Your payments are based on the projected future appreciation of your home and you never have to pay back any of the money that you receive, so long as you keep up your end of the bargain. In exchange for cash today, EquityKey obtains the right to participate in the future appreciation of your home. EquityKey is not a debt and will never touch your existing equity. We split—50/50—any appreciation over the value of your home at the start of the EquityKey program. You always keep 100% of the equity in your home at the time of entering into the EquityKey program. |
Program is currently available only in California, though expansion to other states is planned. Geared toward higher-end homes ($500,000+). |
 |
REX Agreement (866-722-3910 |
The REX Agreement is not a loan, but a real estate investment agreement in the form of a purchase option. It gives homeowners a portion of their home’s equity in cash today—in exchange for the right of REX & Co. to share in a specified percentage of the future increase or decrease in the home’s value. For the right to share in an agreed upon percentage of the future change in value of the home, REX & Co. pays the homeowner what is called an Option Exercise Price—equal to the current value of the home multiplied by the percentage of the future change in value granted to REX & Co. If the home increases in value, REX & Co. shares in the gain. If the home declines in value, REX & Co. shares in the loss. |
Available in a limited number of states. Geared toward higher-end homes ($500,000+). |
It’s certainly good to see innovative reverse mortgage alternatives being developed. It seems, however, that these programs primarily give additional options to niche markets of senior homeowners. The Circle Lending program is a neat concept, but only works if the homeowner has close relatives/acquaintances with fairly deep pockets. The two equity share programs (Rex and Equity Key), on the other hand, seem geared toward homeowners having lots of equity in high value homes ($500,000+) located in burgeoning housing markets. These programs won’t do much for retirees living in a $150,000 homes.
Still, the programs are a good sign that innovation is alive and well. Hopefully, the trend continues with new reverse mortgage alternatives that reach beyond niches and truly benefit the masses. But for now the best for these homeowners is likely going to be a HECM reverse mortgage product.
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