Just as new legislation caps the upfront costs associated with reverse mortgages, a new competitor is gaining steam in the marketplace. That up-and-comer is called the shared appreciation agreement.

Few things are as maddening as seeing a giant fork stuck in the road to your future, especially when you're facing retirement. You could go left and head towards a reverse mortgage, or you could turn right, in the direction of a shared appreciation agreement. Which path do you choose?

Structurally speaking

When it comes to cashing out equity for retirement without accepting the burden of monthly payments, you have two options: the reverse mortgage or the shared appreciation agreement. These are similar in purpose, but radically different in structure. Reverse mortgages are loans that accrue interest at agreed-upon mortgage rates. The shared appreciation agreement is a contract whereby you give up a percentage of your home's future equity appreciation.

In both cases, no funds or finance/equity charges have to be paid back until the home is sold by you or your heirs. For this reason, either product is an attractive retirement planning tool-particularly when you own your home, but are short on cash.

Adding up the costs

Of the two products, reverse mortgages typically cost more upfront. Origination fees can be as much as $6,000, plus you'll have to cover other miscellaneous closing costs. Upfront fees on a shared appreciation agreement vary from a few hundred dollars up to a few thousand.

Other costs to consider are the finance charges on the mortgage and the equity charges on the appreciation agreement. Finance charges associated with a reverse mortgage vary, depending on how much and how often you borrow. Reverse mortgages can be funded with a lump sum, monthly payments, or drawdowns from a credit line. If you take a lump sum funding, the interest charges will be significantly higher than if you borrow periodically against a credit line.

Under a shared appreciation agreement, you receive all of the money upfront. The amount you pay back depends on:

  • What percentage of appreciation you agreed to share
  • The amount by which your home's value increased while the agreement was in force

The agreement typically has to be in force for at least five years, meaning that you'll face penalties if you sell the home sooner. Given where real estate values are now, your home is likely to increase in value before your agreement ends. That means there's a good chance that a shared appreciation agreement could cost at least as much as, if not more, than a reverse mortgage.

Unanswered question

Ultimately, you might have to make the decision based on what sounds more reasonable: borrowing against an asset you currently own, or giving up part of an asset you don't fully have yet. While these are two very different paths, both can lead you to the short-term financial security you need.

    Published on March 11, 2005