A new service allows homeowners to cash out their equity without incurring interest charges and loan repayments.

Summer has finally ended, and the hot weather has made way for colorful autumn foliage. The season might be changing in the mortgage industry, too. A new equity share service is poised to take off, just as homeowners search for ways to raise cash without increasing mortgage debt.

Best of both worlds

For years, mortgage lenders have been arguing for the wisdom of borrowing against home equity, as they've encouraged homeowners to unlock their wealth, enjoy life, and tap into their home equity. Unfortunately, all that borrowing has left many homeowners with a monstrous debt hangover.

Imagine if someone had told you-before you maxed out that home equity line-that you could've cashed out equity without borrowing a cent. Sounds like a late-night infomercial pitch, right? Except that it's for real. You can get a loan-free cash advance on your home equity by executing an equity share arrangement. There are currently just a few companies offering the service-REX & Co., Equity Key, and Grander Financial. But considering that the U.S. is in the throes of a mortgage crisis, more financial players may be tossing their hats into the equity ring, too.

Strings attached

An equity share arrangement is not a home equity conversion mortgage (HECM), reverse mortgage, or any other type of mortgage. The equity investor is actually giving you cash now in return for a percentage share of your home's equity appreciation. You don't pay the money back until you sell the property, and you're not charged interest or hefty origination fees. What you give up is the full ownership of your equity appreciation.

To see how this might work, let's assume that you own a home that's currently worth $500,000. You contact REX & Co., and agree to share 25 percent of your home's equity appreciation with them. In return, REX gives you a cash payment of $30,000. When you sell the home, you pay REX the $30,000 back, plus 25 percent of any change in the home's value. The cool part is that REX takes its cut whether the home's value goes up or down. Continuing our example:

  • If the home's value rises by $100,000, then REX gets $25,000 (or 25 percent of the increase) plus the $30,000.
  • If the home's value doesn't change, REX gets $30,000.
  • If the home's value declines by $100,000, then REX gets $30,000 less $25,000, or $5,000.

Now for the fine print. Generally, you'll be required to keep the home for five years; fees will apply if you sell it before then. Also, not all homes and homeowners will qualify. These equity investors are looking for well-maintained, middle-of-the-road homes. And you need to have good credit and a measurable amount of home equity.

As the sun sets on the home equity borrowing craze, these equity share arrangements may represent the new dawn of home equity management.

Published on September 30, 2008