The soft national housing market and chaotic mortgage environment has sent lenders and investors back to the drawing board in an effort to sharpen their pencils and produce an alternative to corral new business.

The latest niche product designed to tap the trillions dollars of equity tied up in seniors’ primary residences has spread not only to second homes but also to residential rentals and commercial properties.

The soft national housing market and chaotic mortgage environment has sent lenders and investors back to the drawing board in an effort to sharpen their pencils and produce an alternative to corral new business.

The latest niche product designed to tap the trillions dollars of equity tied up in seniors’ primary residences has spread not only to second homes but also to residential rentals and commercial properties.

Equity Key has rolled out an equity-share option that differs from a reverse mortgage in that the program does not charge interest on money taken out of the home. Instead, it gives Equity Key an equal share in the future appreciation of the property based on its present market value.

The concept is similar to the Rex Agreement, another new equity-sharing vehicle that also claims a share of future appreciation. The main differences are that the Rex Agreement has no age restriction while Equity Key is aimed at homeowners between the ages of 65 and 85. The Rex Agreement is not available for second homes and investment properties at this time.

According to Equity Key, it pays the property owner a specific lump sum (approximately 12 percent to 15 percent of the property’s value) or an annual recurring payment in the approximate amount of 0.9 percent to 2.4 percent of the home’s value. In exchange, Equity Key splits any future appreciation on a 50-50 basis with the property owner. The owner retains the equity he or she has accumulated.

When the owner moves out or passes away, Equity Key sells the property, and the accumulated equity (all the equity the owner had prior to the Equity Key transaction plus 50 percent of what accumulated subsequently) goes to the owner’s heirs. The homeowner’s estate has the first right of refusal to purchase the property at the current market value, according to the company.

Here’s how equity-sharing agreements work in a typical situation: Let’s assume a home is valued at $500,000 and the owner signs an equity share for a $50,000 advance. If the house sells seven years later for $600,000, the equity sharing company gets $100,000 — $50,000 in repayment and half of the $100,000, the home’s appreciation since the deal was signed. If the value is flat after seven years, the sharing company gets only $50,000. (With Equity Key, the owner does not have to repay the initial advance if the owner meets the term of the agreement.)

If the house’s value decreases by $100,000, the sharing company and the homeowner would share the loss equally — $50,000 each. The equity-sharing company would receive no money upon the sale while the homeowner would be liable for the remaining $50,000 of loss.

Owners must continue to maintain the property while keeping taxes, insurance and any mortgage payments current, and not exceed the agreed-upon limit on the total principal amount of any loans that may be secured by the home.

Providers of reverse mortgage alternatives are betting they will draw customers because of their fewer upfront fees and costs and absence of an interest-bearing mortgage. The big unknown is the future value of the home. Regardless of the peaks or valleys of appreciation, the owner will owe the equity-sharing company 50 percent of the value from the time the agreement was signed until the day the property is sold.

Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home. There are no restrictions on how reverse mortgage funds are used.

If Equity Key acquires the property at the end of the agreement term, it will charge an acquisition cost equal to actual third-party costs to sell it. This cost will not be greater than 8 percent of the fair market value of the house at the time of sale.

In order to participate, homeowners must be in good health and able to qualify for a life insurance policy. Ineligible homeowners include smokers, those with Type 1 diabetes and others who’ve had recent bouts with cancer. Equity Key takes out an insurance policy to protect its interests in case the homeowner dies before the company recovers its initial investment. If the owner does not meet the Equity Key requirements, the $300 application fee is refunded.

If you plan to tap in to any property equity — primary residence, second home or rental — do so wisely and with the help of professional advice. Depending upon your circumstances, one way might be better than another.

To get even more valuable advice from Tom, visit his Second Home Center.

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