Tap Home Equity… Without Refinancing or Taking Out a New Mortgage Loan
How can you take out equity without taking out a home equity loan or following through on a cash-out refinancing?
A small San Francisco investment company, backed by a subsidiary of insurer American International Group Inc., is rolling out a product allows for this unique course of action.
The company, REX & Co., offers to pay homeowners cash now in exchange for a right to part of the equity proceeds when the home eventually is sold.
The owner of a home valued at $750,000 might obtain $100,000 in cash by giving REX a 50% share of the change in the home’s value. If the home sold for $850,000, REX would receive $150,000 — the original $100,000 invested plus half of the increase in value. If the home sold for $650,000, REX’s share would be $50,000, half of what it had invested.
Home Equity Loan Borrowing Stalls as the Housing Market Cools
Thomas Sponholtz, a former executive at the investment arm of London’s Barclays PLC who founded REX in 2004, describes the product as an alternative to debt-based methods of extracting cash from a home, such as home-equity loans or reverse mortgages.
REX has completed only “a handful” of transactions, he said. AIG’s AIG Financial Products unit acquired a minority stake in REX in December, but hasn’t disclosed the terms. Other investors include Mr. Sponholtz and several institutions. REX said its product is available in nine states - California, New Jersey, Virginia, Florida, Illinois, Washington, Colorado, New York and North Carolina - but the company aims to offer it nationwide within a couple of years.
Among potential users of REX contracts, Mr. Sponholtz said, are baby boomers who have most of their wealth tied up in a home and want to extract some of it for an annuity or other cash-generating investment.
REX aims to reach consumers through mortgage brokers, realestate agents and financial planners, as well as through its website. Brokers and other intermediaries could charge fees as high as 2% of the cash obtained by the homeowner. People who sell the home in less than five years face an “early exit” fee ranging from 5% to 25% of Rex’s initial payment.
Jack Guttentag, who operates a mortgage-advice website, said REX could be an attractive way for people with lots of home equity to put some of it to work in stocks or other types of investments, diversifying their risks.
Deciding whether the cash payment is sufficient, though, would depend on estimates about the likely long-term appreciation of the home. Don’t make a decision until you’ve also considered the pros and cons of cash-out refinancing.
SOURCE: The Wall Street Journal