Once upon a time, taking on debt or selling your house was the only way to cash out your home equity. Now there's a new choice-introducing the REX.

You might feel like royalty when REX & Co. Inc. offers to give you $50,000 as an equity investment in your house. But don't get comfortable in a jeweled crown just yet. Most homeowners with good credit will qualify for the same deal. It's called a REX, and it's a debt-free way to monetize your home equity.

Understanding REX

The REX is an entirely new type of home equity instrument. It's offered by San Francisco-based REX & Co. Inc. and serves the needs of homeowners who need cash but don't want more debt.

The REX provides you with an upfront, cash payment in return for a share in any future increase or decrease in your home's value. The money you receive is not a loan-so you aren't committing yourself to principal or interest payments. You don't repay the funds to REX & Co. until you sell your home or the agreement expires. Depending on where you live, REX agreements are in effect for 30 to 50 years.

How REX works

To understand how this works, let's lay out a scenario in which your house is currently worth $500,000. After some paperwork and negotiation, you agree to receive an upfront payment of $75,000. In return, REX & Co. has the rights to 50 percent of the change in your home's value, payable when you cancel the agreement or sell your house. Now, fast-forward 15 years when it's time to sell. Here are some potential scenarios:

The house sells for $600,000. You pay REX & Co. the $75,000 plus $50,000. The additional $50,000 represents REX's 50 percent share of the home's $100,000 appreciation.

The house sells for $500,000. You pay REX & Co. the $75,000.

The house sells for $400,000. You pay REX & Co. the $75,000 less $50,000. The deduction of $50,000 represents REX's share of the home's depreciation.

The fine print

As you can see, a REX arrangement might be an attractive alternative to a home equity loan. But be sure to consider the following before making any decisions:

The REX is only offered by one company and currently available in only nine states (CA, WA, IL, VA, NJ, NY, FL, CO, NC).

The amount of risk you take on is a function of moving parts, including: how you plan to use the money, what other investment options you have, and how your home's value might change over time.

The arrangement is intended to be long-term. If you sell the home within five years of inking the deal, you'll incur penalties.

Even if a REX isn't for you, you can use your newfound knowledge to stimulate an entertaining discussion among friends at your next cocktail party. Just remember to leave the jeweled crown at home.

Published on July 16, 2007