The nation’s largest reverse mortgage lender recently rolled out the latest wrinkle in enabling seniors to tap the equity in high value homes – a “jumbo” reverse with no upfront fees.

Irvine, Calif.-based Financial Freedom, recently purchased six weeks ago by IndyMac Bank from Lehman Brothers FSB, now is offering a “Simply Zero Cash Account” reverse mortgage in an effort to reduce the expensive perception of reverse loans. Simply Zero features no origination fee and no closing costs.

“With Simply Zero, we have even eliminated origination fees and third-party costs to provide borrowers with a loan that answers their needs and which removes a key barrier – the perception that these loans are expensive,” said Jim Mahoney, Financial Freedom’s chief executive officer.

The interest rate on the Simply Zero is the six-month LIBOR Index plus five percentage points. The rate has been hovering between 6.5 percent and 7 percent recently. The only significant difference from the other Cash Account programs Financial Freedom offers is that the borrower is required to withdraw all available funds (and begin accruing interest) when the Simply Zero reverse mortgage closes. The typical borrower usually has a definite investment plan for the funds.

Financial Freedom first introduced a jumbo reverse mortgage in 1996. Jumbo amounts, now starting at $330,7000, adjust annually and are greater than the “conforming” limits established by Fannie Mae and Freddie Mac.

The nation’s most popular reverse mortgage, the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM), carries a lower interest rate but borrowers are limited in the amount they are able to borrower by FHA’s loan ceilings and geographic regions. Urban areas typically have higher loan ceilings than rural areas. Borrowers have to pay HECM loan fees, typically 2 percent of the appraised value plus a 2 percent mortgage insurance premium, but these fees can be subtracted from the loan proceeds. Thus, borrowers do not have to pay “out of pocket” for most of these fees.

Reverse borrowers make no monthly payments on a their mortgage during its term. The loan comes due when the borrower permanently moves out of his or her home. To qualify, consumers must be at least 62 years of age and own their own home. The home does not have to be paid off entirely but the greater the equity, the greater the reverse loan amount.

However, seniors can “outlive” the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage, even if the principal balance grows to exceed the value of the property. If the value of the house exceeds what is owed at the time of homeowner’s death, the rest goes to the estate.

Financial Freedom offers its Cash Account reverse mortgage in three forms. While all programs could change at any time, these options typically will consider one- to four-unit dwellings where one of the units is owner-occupied: condominiums, townhomes, planned unit developments and some co-ops. Here’s a quick summary of the packages available:

Basic Cash Account This can be set up as a lump sum, line of credit and/or monthly payments. Origination fees are 2 percent of the first $500,000 of value, 1.5 percent of the next $500,000 of value and 1 percent on any amounts greater than $1 million in value. For example, a home valued at $1.5 million would have an origination fee of $22,500. Other closing costs ($1.5 million home value) include a $500 application fee, $2,500 for title insurance, $350 for processing and $1,000 for closing. There is no mortgage insurance premium even though the loan is “non-recourse.”

Cash Account, Zero Point Option – While there is no origination fee, there are “third party” closing costs (appraisal, title, credit, etc.) that are capped at $3,500. The Zero Point Option also is tied to the six-month LIBOR Index. In order to balance the no-fee structure, consumers who choose the Zero Point Option must take out at least 75 percent of the maximum funds available at closing. For example, if $100,000 is available, borrowers must take out (and begin paying interest on) $75,000. In some other reverse packages, the cash can be put in a line of credit and used as the consumer needs the funds. However, the Zero Point Option would allow only 25 percent of the funds to be placed in a line of credit.

Cash Account, Simply Zero Option – Less than one year after Financial Freedom rolled out the Zero Point Option, the company introduced Simply Zero. The philosophy being if Simply Zero could increase loan volumes by 200 percent, perhaps an absolutely no-cash-out-of-pocket program also would be big dividends.

Time will tell, but there’s probably a niche. More seniors simply need more monthly cash these days to supplement dwindling financial portfolios and offset the high cost of health care.

Tom Kelly’s new book “How a Second Home Can Be Your Best Investment” (McGraw-Hill, $16.95) was co-written with John Tuccillo, former chief economist for the National Association of Realtors and is now available in local bookstores. He can be reached at news@tomkelly.com.

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