Finding Cash in a Home

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Many older adults looking to extract cash from their homes have recently turned to reverse mortgages, rather than take on new monthly debt through second mortgages or home equity lines of credit. But these transactions can be expensive -- closing costs can often run to $15,000 -- and risky, since borrowers face big penalties if they move.

Now, financial institutions are starting to offer new alternatives to such loans. One particularly innovative idea is being offered by EquityKey, a San Diego-based company that is a division of KBC Bank, a financial services company with headquarters in Belgium. EquityKey's service essentially offers a cash advance on the home, in exchange for the owner's promise to share in the home's future appreciation.

Owners 65 to 85 with good credit who live in homes valued above $400,000 (above $500,000 in New York and California) can receive a payment of up to 15 percent of a home's equity. Those who move out within 10 years must pay back the entire amount -- and 5 percent more if they move within the first five years.

If the house sells at any time after that, though, the customer or the estate pays EquityKey only if the home's value has increased since the time of the payment. In that case, EquityKey receives half of the appreciation amount. If the homeowner dies within 10 years of signing the deal, the heirs owe nothing to EquityKey.

That is because the company takes out a life insurance policy on the client at the time of the transaction. "So, you need to be able to qualify for life insurance to do this," said Jeff Nash, a founder of EquityKey. If that is the case, the transaction can yield significant benefits to those who are "house rich and cash poor," he added.

Take, for example, the owner of a home appraised at $1 million. EquityKey conducts a credit check and otherwise evaluates the applicant's financial ability to maintain the home. It also considers local market conditions in determining the likelihood that the home's value will rise.

Assuming the applicant clears those hurdles, EquityKey writes the homeowner a check of up to $150,000 and refunds a $300 application fee. There are no closing costs. Mr. Nash said income and estate tax implications depend on each homeowner's circumstances, but he said clients typically need not pay taxes until the home is sold.

Mr. Nash said a prospective client should speak with a financial planner before entering such a transaction. "If you have some reasonable likelihood of being forced to sell your home in the near term," he said, "don't do this deal."

With its risk-sharing concept, EquityKey is similar to products recently introduced by Grander Financial and REX & Company -- but neither of them imposes age restrictions. Grander Financial serves customers in New Jersey and Connecticut, but not New York.

REX & Company, which serves all three states, offers clients cash advances of up to 15 percent of the home's value. But unlike EquityKey's transactions, REX agreements require clients to repay part of the payment if the home loses value when it sells.

Michael Berman, REX's chief executive, said the company had conducted about 175 transactions and disbursed about $20 million. The typical client, he said, is someone "who is very sophisticated financially."

"They seem to really understand what they're getting into, and know they're choosing to forgo some of the change in value of their home for some good use of the money," he added. "It's definitely not an impulsive thing."