No-fee reverse mortgage offers new way to get cash for those over 62

Older homeowners who are cash tight but home-equity rich now have a new way to get their hands on needed funds.

Called the Zero Point Cash Account, it's a no-fee jumbo reverse mortgage open to those 62 or older whose homes are worth at least $450,000.

Most reverse mortgages are available only to seniors whose houses or condominiums are worth far less.

A reverse mortgage allows older homeowners to cash out equity while still retaining title to their property. What makes it significantly different from a standard cash-out refinance is the repayment schedule. There are no monthly payments as long as the homeowner remains in the property. Furthermore, the income is tax-free, and owners can never owe more than their home is worth.

Because of the high home values in this area, "Seattle is an excellent market for us," says James Mahoney, CEO of Financial Freedom Senior Funding Corp. The nation's largest reverse-mortgage lender and servicer and a subsidiary of Lehman Brothers Bank, Financial Freedom recently introduced the Zero Point Cash Account.

"The West Coast and the East Coast are your prime jumbo markets, your high-end homes," says Mahoney. "Seattle, in particular, is a very appealing market."

Credit robust home-appreciation for that. "What's happening to a lot of these seniors is they bought their house for $250,000, and now they've seen it go to $750,000. They've seen all this locked-up equity."

The number of seniors unlocking their home's value has made Washington the eighth-ranked state for reverse mortgages, behind No. 1 California, but ahead of New Jersey and Pennsylvania, among others.

Financial Freedom handles a number of reverse mortgages. What sets the Zero Point Cash Account apart, besides the higher house value, are the fees. Mahoney says it's the first no-fee loan in the industry, meaning that up-front origination fees charged by the lender have been eliminated. Additionally, third-party closing costs (usually for such items as appraisals and credit reports) have been capped.

As a result, Mahoney says, fees won't total more than $3,500 — about half what the owner of a $1 million home would pay in fees for a cash-out refinance.

As is standard with reverse mortgages, this new one's interest rate is adjustable. It's also capped at 6 percent over the initial rate, which Financial Freedom says is the lowest cap in the industry. The introductory rate is generally about 1 percent below that of a standard 30-year fixed-rate mortgage.

To balance the lower fees, Financial Freedom will require borrowers to draw out 75 percent of their maximum available amount when the loan closes, rather than being able to choose a lesser amount, as is customary with its other reverse products.

"So the thing is less flexibility for the borrower," Mahoney says, "but most people do take out a sizable amount of their available credit, so for no (lender) fees, there's a big savings."

Studies have shown that many reverse-mortgage borrowers tap their equity to give them enough cash to stay in their homes. So the money goes for property taxes, daily living expenses, medical costs.

Although Financial Freedom hasn't researched what more affluent borrowers do with their money, Mahoney suggests they may be "more proactive in their retirement planning, so they're using it for estate planning, using it for long-term care insurance, helping their kids with college."

To make sure a reverse mortgage is the right move for these homeowners, all applicants receive third-party counseling. That's standard in the reverse-mortgage industry.