Thanks to everyone for the replies. Great info!
FOLLOW UP:
On my mother's request, I called the man offering her the loan/refi. He was not nice to me on the phone - very defensive, which of course made me more suspicious. However, he did explain a couple of things that may be worth considering:
1 - the loan processing fee is $3k, which I assume is added to the loan somewhere
2 - reorganizing the loan with this program, in his explanation, will actually save her money in the short and long run. He said that the loan will enable her to focus her payments on paying down the principle faster (by lowering the monthly minimums) as long as she keeps her house payments at their current levels (assuming the APR is below 4%, which he said was likely). In other words, she'll make up the 3k of fees pretty quickly in the equity. He said that traditional mortgages are arranged so that most of your payment for the first half of the loan goes to interest, but this switches that around (this could be the catch - maybe the later value of the house is actually lower because of the interest accrued??)
3 - she doesn't have to use the cash that is loaned - it's more like a line of credit (I also assume that using the line of credit would bring finance charges, like a credit card, albeit at a low APR)
Could it be possible that it actually will SAVE her money? It seems like these things could also be done by a traditional re-fi (except #2).
He did not give me specific numbers for things like APR and monthly payments, insisting that they will come once they get all of the paperwork drafted and ready to sign. I am very uncomfortable with that, of course, and I told my mother that we need at least some rough guesses before I would want her to proceed.