Page Reviewed / Updated - Mar. 2016
A REX Agreement is a contract with an organization called FirstREX that enables a homeowner to convert a portion of their home equity into cash. It provides the homeowner with a lump sum of cash today, in exchange for a percentage of the change in the home's value (20% to 50%) in the future. This means there is no interest charge or monthly payments to be made.
As an example a homeowner with a home valued at $500,000 could receive $50,000 in a lump sum in exchange for a 50% share of the future change in the value of the property. So, if they sell their home in ten years for $550,000 the home will have appreciated by $50,000. At the time of sale, the homeowner will pay to FirstREX, the original $50,000 and 50% of the appreciation of the home for a total payment of $75,000.
A REX Agreement allows FirstREX to share in a home's appreciation as well as share the risk if the home depreciates. If the same $500,000 home depreciates by $50,000 and is sold for $450,000 then the homeowner pays to FirstREX the original $50,000 MINUS 50% of the home depreciation. In this case, the home depreciated by $50,000, so $50,000 X 50% = $25,000. The homeowner pays FirstREX $50,000 - $25,000 which equals a total payment of $25,000.
FirstREX and the homeowner agree on the home’s value using an independent, licensed appraiser. The homeowner then decides how much cash they need or want which will determine the percentage of the future change in value they will share with FirstREX. The cash received by the homeowner may be used for any purpose such as the purchase of long term care insurance, re-modeling the home to make it accessible for the elderly or toward paying for a home care worker.
The maximum term of the REX Agreement is 30 years; however, the agreement typically ends when the homeowner sells the property. The REX Agreement is intended to be a long-tem agreement and therefore if the homeowner sells the property during the first five years there will be an Early Termination Adjustment equal to 20% of the initial cash payment.
Similar to a reverse mortgage, individuals are required to live in their home during the entire term of the REX Agreement. Should care needs require an individual to move from their home for more than 12 consecutive months and it is clear they will not be returning, then the Rex Agreement comes due. If this occurs during the first five years of the Agreement, there is an Early Termination Adjustment equal to 20% of the initial cash payment.
For this reason, a REX Agreement should be a potential source of funds for long term care only for seniors where at least one of the spouses has no intention of moving for at least five years. To further clarify, should a single senior or both spouses of a couple require assisted living or skilled nursing in the near future, REX Agreements are not a good option.
As with reverse mortgages, the concern that FirstREX can force a homeowner to sell is not justified. FirstREX does not go on title and is not a co-owner. Homeowners are required to live in and maintain the home in good condition and to stay current on their mortgage, insurance, and tax payments. If an issue does occur, the homeowner can terminate the agreement, keep the home, and pay the early termination fee.
Homeowners can make home improvements, such as making a home more accessible for the elderly, without FirstREX unfairly benefiting from those improvements. Homeowners simply notify FirstREX of the improvement, and the value of that improvement will be considered a factor in the appraisal when the home is sold.
Although homeowners do not make monthly payments to FirstREX, applicants are required to have good credit. Their credit is evaluated to ensure they are in a position to continue to make any mortgage payments should they have an outstanding home loan.
Homeowners must be over the age of 18 to qualify for a REX Agreement. There is no maximum age. Disability or health status is not considered a factor, but because the home must be owner-occupied and there are early termination fees, persons whose health may require them to move from the home within five years are not good candidates for this source of funds. Marital, family, or veteran discharge statuses are not factors in eligibility.
The home must have a minimum appraised value of $250,000, and the applicant must, at a minimum, have 25% equity in the home. Commercial properties, condominiums (as part of large complexes), and co-ops are not eligible properties. The condition of the home is also a consideration factor.
FirstRex continues to expand the geographic area in which their agreements are made. As of the last update to this page (March 2016), Rex Agreements were available in California, Colorado, Connecticut, Illinois, Florida, New Jersey, Oregon, Virginia, Washington, Maryland, Massachusetts, Pennsylvania, and Washington DC. Rex Agreements will also soon be available in New York.
REX Agreement benefits are paid out in a lump sum at the time of entering the agreement. There are no restrictions on how the proceeds can be used. Persons entering a REX Agreement receive between 4% - 10% of their home’s value in cash. This amount varies with the percent of the home’s future appreciation they are willing to share.
The costs associated with a REX Agreement should be considered at three levels.
1) There is the cost associated with giving up a percentage of the home’s appreciation. This can be difficult to determine because one cannot predict the future value of their home.
2) While a REX Agreement is not considered a loan, there are closing costs. These include flat fees of approximately $1,500 for escrow, title and flood certification and a variable fee equal to 3% of the lump sum payment.
3) Finally there is a home appraisal cost (approximately $500 - $800) which is the homeowner's responsibility whether they choose to move forward with the REX Agreement or not.
Interested individuals can learn more and apply on the REX Agreement website or by calling 800-588-7600.