Complexity snags the use of home equity in retirement

Equity in a house owned for years by a retired couple often represents the bulk of their estate. Harnessing that equity for living expenses can be difficult.

The idea of a reverse annuity mortgage (RAM) -- where the ower's mortgage debt increases as he takes equity out of the house systematically in the form of monthly payments -- appears to be dead.It has been killed by high interest rates.

Alternatively, selling a house, investing the cash in securities and renting housing is proving less satisfactory for some retirees as rents increase faster than income from secure but low-yield investments.

But one reader, B.W.S., is considering another approach -- one that would work if the right combination of prices, retiree age, and individuals' investment philosophies could jell into a deal where everyone could benefit. She and her husband in their early 80s own a house with a market vale of $80,000 . The heir is a younger brother. The house is paid for and their only housing expenses are for taxes and upkeep. Her question: "Could we sell our house at $ 50,000 but retain the right to continue living here until either we die or must move for medical reasons?" They live in California, and a change of ownership would increase taxes considerably because of provisions of Proposition 13. Real estate appears to be continuing to appreciate in their area.

One option could be to contract for a sale to a private investor at some future date, which could be defined as one or both deaths or inability to continue living in the house. The contract could specify the $50,000 price plus an income of $200 a month and assumption of taxes and maintenance expenses.

A contract buyer would gain future title to a property worth about $30,000 more than the specified price. Assuming a 10- percent appreciation annually, the value would increase the first year by $8,000, out of which expenses of $2, 400 monthly payments plus an allowance for rent, taxes and maintenance would be deducted. However, the $50,000 price would not be due until the actual sale occurred as detailed in the contract. Thus, the investor would be out-of-pocket only the cash for monthly payments, taxes, and maintenance. It would probably be necessary to give tax money to the couple and let them pay the taxes since title remains in their name.

At the termination of the contract, the $50,000 payment would be due to the estate. The younger brother would be liable for a state tax on his inheritance.

The figures in this example could be negotiable. Perhaps $30,000 is an excessive discount when the couple's ages are in the 80s. The $30,000 discount might not be attractive if a couple could look forward to 20 years of life expectancy. Appreciation could average more or less than the 10 percent used in the example. The retiree couple might negotiate an indexed monthly payment to keep up with inflation. And individual investors willing to wait for a capital gain payoff might be scarce. Institutional lenders would probably not be willing to enter into such a contract.

Another option would be to sell the house with the couple financing the sale by holding the contract. Regular payments of both interest and principal would be paid monthly to the couple. But, the contract could also stipulate that the couple could remain in the house and pay rent for as long as they wished. The rent could be set to increase at some percentage to account for inflation. A sale at $70,000 with $10,000 down would leave a contract calling for payments of