Is This The King of Reverse Mortgages?
June 18th, 2007
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We usually think of reverse mortgages in terms of lenders, interest and payments. In fact, it doesn’t have to be this way.
But suppose we said that someone would give us cash and we would have no payments as long as we lived in our home. That sounds like a reverse mortgage.
What doesn’t sound like a reverse mortgage is this: There’s no interest. None.
A new financial product from Rex & Co. is something that reverse mortgage borrowers might want to look at.
In essence, they follow the Middle Eastern idea of financing without interest. In general terms, it works this way:
The homeowner gets a given amount, up to $300,000. Since the money received is not income, like a reverse loan the money is not taxed. See a tax pro for specifics.
Rex gets no interest. Instead, the value of the property is established with an appraisal. If the property is sold within the next 50 years (sometimes less in certain jurisdictions), Rex and the homeowner split any appreciation.
Most interesting, if the value of the property falls, Rex and the homeowner split the loss. If the value of the property is unchanged, you owe Rex nothing.
As I understand their system from the calculator:
Imagine that the is worth $750,000.
There is a 25% of the future value is to be shared.
You immediately get $53,571
If the value grows to $900,000 (an increase of $150,000) Rex gets its $53,571 plus $37,500 (25% of $150,000). You get $862,500.
If the value is flat and you sell, Rex gets $0 in addition to the return of its $53,571. You get $750,000.
If the value of the property falls to $600,000, then Rex loses $37,500. You get $637,500 (because the loss of value is shared with Rex.
This is very different from a traditional reverse lender. If the value of a home goes down, with a reverse mortgage all equity in the property still goes to satisfy the loan and the lender. Moreover, with a traditional reverse mortgage, interest cost increase the size of the debt far beyond the cash actually received.
Rex has a calculator that is very much worth trying. It is unlike any other reverse loan calculator I have seen.
What Rex is proposing is really shared risk. This is different than the usual lender/borrower relationship and something which may be better for homeowners.
As always with any reverse mortgage product, speak with an attorney who specializes in elder law for specific advice.
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June 18th, 2007 at 7:32 am
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June 19th, 2007 at 9:21 am
King? I don’t think so.
Rex will loan a maximum of 15% of FMV. They charge a $15,000 service fee at time of sale. They get an equity share of 3.5% for every 1% they loan you. No interest accrues, but if you get the maximum of 15%, this can mean up to 52% of your equity over time (15 X 3.5).
In California, this can be a whopper. Correct me if I am wrong, but if a 15% loan ($25,000) is taken out on a $169,000 home today, and that home sells for $750,000 10 years later, you will owe about $342,000 to Rex ($25,000 original loan + $15,000 service charge + $302,000 for 52% shared equity).
While it may serve its purpose for some cases, I would not call it King of anything, let alone of reverse mortgages.
June 21st, 2007 at 2:54 pm
Maria –
Thanks for your note.
As the original posting says, “as always with any reverse mortgage product, speak with an attorney who specializes in elder law for specific advice.”
In the case of a loss it sure doesn’t sound like the people at Rex are getting 3.5 percent for every 1 percent they put in.
As to the term “king,” it’s a play on words. The name “Rex” means “king” in Latin. See: http://www.thinkbabynames.com/meaning/1/Rex.
As always in these situations, the blog is a commentary and not an endorsement — thus the note to see a specialist in elder law.