Sadly, many seniors are unable to access this resource without selling their homes or obtaining an expensive reverse mortgage. Today there’s a new model for helping seniors tap into their equity that may become a widespread alternative in the not-too-distant future.
Until now, if you were over the age of 65, there were few alternatives for using the equity from your home. You could refinance, but you had to qualify, pay points and fees, and make monthly payments.
The other choice was to obtain a reverse mortgage. You could choose to receive your payout as a lump sum, a lifetime monthly payment, a monthly payment for a limited term, a line of credit, or a combination. You would never owe more than the value of the home, regardless of the amount paid out.
Reverse mortgages require points and fees, which usually run about 5 percent of the property value. On a $400,000 property, that’s $20,000. The homeowner must occupy the property as his or her primary residence, and if he or she becomes ill and is away from the home for more than 365 days, the reverse mortgage becomes due and/or the property must be sold.
When the homeowner dies, the property goes to the lender. In some cases, the property may be sold, provided that both the interest and principal paid by the lender can be reimbursed. If this is the case, then the balance could go to the deceased’s estate.
As a rule of thumb, the younger the borrower is (minimum age is 62), the smaller any monthly payment would be. For more information on reverse mortgages, visit the Federal Trade Commission Web site at www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm.
Now there’s a new model called Equity Key available to residents of California, Florida and New York who own property with a cumulative value of at least $500,000 and have at least 30 percent equity in their property. Unlike reverse mortgages that are typically limited to primary residences, Equity Key accepts primary residences, rentals, commercial and second homes.
The Equity Key model is an appreciation-sharing model. In other words, Equity Key pays the property owner a specific amount (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 takes a partial ownership position and 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 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.
The Equity Key program is designed for homeowners between the ages of 65 and 85. They must be in good health as well as being able to qualify for a life insurance policy. Ineligible homeowners include those with Type 1 diabetes, those who’ve had recent bouts with cancer, and smokers. Equity Key takes out an insurance policy to protect their interests in case the homeowner dies prior to the time that they recoup their initial investment.
The Equity Key program is different from reverse mortgages in a variety of ways. First, there is no additional debt created. Whatever money the owner receives is his or hers to keep. Like a reverse mortgage, the money taken from Equity Key is not considered income. Therefore, no taxes are due on this distribution.
Instead of paying up to 5 percent in closing costs, the owner pays a small application fee of $300. No credit check is required nor is there an income requirement. If the owner does not meet the Equity Key requirements for some reason, the application fee is refunded.
One of the most important advantages about the Equity Key program is that the owner does not have to occupy the property as his or her primary residence. This means that if the owner becomes ill and has to live elsewhere, the property can be rented rather than having to be sold. Equity Key does require the owner to continue to make repairs, keep the property in good condition, and provide adequate insurance.
Property owners can use this program to fund a down payment for their children without touching their personal nest egg. They could also use the money to update their home to fit their needs as they age. Another use would be to purchase long-term health insurance with an extended care option. Alternatively, it could provide the money they need to live a happy, fulfilling retirement rather than just scraping buy.
Because this Equity Key is a transfer of real estate, they do pay a commission to agents. This is an entirely new way of earning a commission without having to displace an elderly homeowner. It will be interesting to see whether this new model expands to other states as well as to those who may have a smaller net worth.