A retirement option: tapping into home equity

''House rich and cash poor.'' That may sound like a code to some people, but many others, to their displeasure, know all too well what it means.

These are the people - usually older people - who own their homes free and clear of any mortgage debt but have barely enough money to live on. Ironically, their houses might be worth $100,000 or more, but unless they want to sell their home, they may find themselves living in a very nice house and unable to make ends meet.

A solution that has been slowly developing for the last several years is generally known as ''home equity conversion.'' Although this term covers a variety of programs, they all share the goal of providing older homeowners a guaranteed monthly income for life without forcing them to move out of their homes.

Until now, these programs lacked one major ingredient needed to propel them out of the experimental stage: a large participant that could win the confidence of people with only one major asset.

That ingredient may have been added recently when Prudential-Bache Mortgage Services, a division of the brokerage firm, entered into an agreement with American Homestead Mortgage Corporation of Mount Laurel, N.J., to offer American Homestead's Century Plan. Beginning this month, Pru-Bache will test-market the plan, which it will call the Individual Retirement Mortgage Account (IRMA), to homeowners 62 years of age and older in New Jersey and five Pennsylvania counties in the Philadelphia area. If the test proves successful, Pru-Bache will gradually expand IRMA to other parts of the country where there are heavy concentrations of elderly homeowners.

Through IRMA, homeowners can receive from $150 to $700 a month tax free as long as they live in their homes. The amount they get depends on the value of the property (although usually the loan will not represent 100 percent of that value), their age, and the percentage of equity they wish to convert. If a person has $100,000 of equity, for example, but still wants to leave $30,000 to relatives or a charitable or other organization, he or she can arrange it so only $70,000 is involved in the equity conversion. The monthly payments will be smaller, but that may be enough to meet the person's needs.

Another name for programs like IRMA is the ''reverse shared-appreciation mortgage.'' It is an improvement over the older reverse annuity mortgage (RAM), since the money from RAMs is usually used up in seven to 10 years. In that time, the homeowner receives payments for the full value of the house, after which the homeowner must move out. While RAMs are good for people who have no heirs and know they will be moving in a few years anyway, these new programs are designed to provide lifetime income and occupancy in the house.

With the long-term reverse mortgage Pru-Bache and American Homestead are offering, the lender (Pru-Bache in this case) pays the borrower (the homeowner) regular monthly amounts, while the borrower agrees to put up his or her home as security to the lender to guarantee eventual repayment. At the end of the loan term, or whenever the borrower sells the property or passes on, the principal and interest are repaid from the sale proceeds of the house.

Even if the total funds exceed the owner's equity in the house, the program guarantees the monthly payments at least to age 100.

Some homeowners, said American Homestead president James Burke, need more than a monthly check. They may also need a one-time payment of $2,000, $3,000, or more at the beginning to handle immediate financial problems, such as outstanding bills. This program can provide for that, he said.

Pru-Bache and American Homestead aren't the only players in the equity-conversion game. The concept and the products have been slowly developing for several years, and although there is no nationwide program yet, projects are under way or planned in several regions and cities.

The San Francisco Development Fund, for example, acts as a screening and counseling service for people considering an equity-conversion program there. Representatives of the fund are visiting Boston this month to help Action for Boston Community Development set up a similar program, said Don Ralya, administrator of the San Francisco Development Fund.

Another program is under way in Buffalo, and several other cities are considering them, said Ken Scholen, director of the National Center for Home Equity Conversion.

Although these programs have been developing ''slowly but surely,'' as Mr. Scholen puts it, all those involved agree that the Pru-Bache entry could provide the impetus the concept needs to push it nationwide. The knowledge that what is supposed to be a lifetime source of income is backed by a large, well-known company should help reassure elderly homeowners.

''I think the fact that a very large financial service firm has finally stepped into the business lends an aura of credibility,'' Scholen said.

Still, the experts say, home equity conversion is not for everybody. Before moving to Boston to practice law a few months ago, Trudy Ernst worked with the San Francisco group, counseling senior citizens. She says 4 out of 5 people who asked about home equity conversion did not need it. Often, alternatives such as reassessing spending patterns or assistance from family members eliminated the need to spend part of the equity in the house.

Also, because these programs are so new and have a number of variations, a lawyer or financial adviser who is experienced in mortgage financing should be consulted closely.

Homeowners interested in the Pru-Bache program can call (215) 476-IRMA, collect. New Jersey residents can call 800-222-IRMA, toll free. For information about other programs, send a stamped, self-addressed business envelope to National Center for Home Equity Conversion, 110 East Main, Room 1010, Madison, Wis. 53703. Scholen emphasizes that his list is not an endorsement of any program; it is only a collection of current efforts at home equity conversion.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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