July 29, 2008

Rex Agreement = Bad idea

I just saw a TV commercial for something called a Rex Agreement. Its a financial agreement where you get some equity out of your home in exchange for agreeing to give the company rights to a part of your homes future appreciation.

Basically it works like this: You get money up front. In exchange for that the Rex company gets 50% of the appreciation in your home after its sold in the future.

Here is an example: Say your home has $600,000 in total value right now. You can get about $71k in equity out of your house now. In exchange you promise the Rex company 50% of the future appreciation of the home. Once the current real estate downturn is over, it is pretty reasonable to expect average home appreciation of 4% in the long term. So 5 years later your home has gone up about 4% a year and is now worth $730k. The increase in appreciation is +$130k. 50% of that is yours to keep and the other 50% is kept by the Rex company. So you're paying $75k interest in 5 years for a $71k equity loan. That equates to about 15.5% interest rate. Ouch! That doesn't sound like a bargain to me, how about you?

By comparison if you use a Home Equity Loan (HEL) instead your interest rate is going to be in the 7-8% range. If you borrow $71k in equity form your home from a HEL at 8% interest for 5 years you would be paying about $15,300 in interest versus $75,000 for the Rex agreement.

To be fair I should point out that it is possible that your home may not increase in value over the next few years or it might go down in value. If this happens then the Rex agreement would be better for the borrower. However long term we can reasonably expect homes to appreciate so its most probable that the Rex agreement will not work out well.

The Rex Agreement at first glance looks like a good deal. Its pitched as no payments and easy access to up front money. But the long term cost of the deal is not a good one. Stay away from a Rex agreement. If you need to draw equity in your home then a home equity loan or home equity line of credit is going to be a better choice.

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