Reverse Mortgage is a general term. There are proprietary reverse mortgages and the “gold standard” FHA Home Equity Conversion Mortgage (HECM) Reverse Mortgage. It is a financial product that when used correctly with a plan in place it can be the 4th bucket of money in retirement planning.
First let me explain that a Reverse Mortgage whether a refinance on your current home or a purchase money loan on a new home is exactly the same as having a traditional conventional mortgage lien on your home.
Your home is not a liquid asset. In order to make the equity in the home liquid you need to use the home as collateral to get “cash out” in the form of a loan. You sign a promissory note, and a Trust Deed (or Mortgage) lien is recorded against the home and released once the “monies” are paid back in full. The difference between the Reverse Mortgage loan and Conventional loan is making a monthly payment. In the end both loans need to be repaid.
With a Conventional loan you make a monthly payment which mainly goes towards the interest on the balance. Very little is applied to the principal balance in the first 9-11 years. The loan balance remains the same and decreases over time.
With a Reverse Mortgage loan you do not make monthly payments. The interest accrues on the balance and each month they add the interest due to the balance; therefore the balance increases.
In a nutshell you either pay monthly on the loan until it is paid in full, or sell the property and pay off the loan at that time. In the case of a Reverse Mortgage all monies due are paid upon death of all borrowers on Title, refinance of the loan or sale of the property.
With either loan upon sale any equity/monies left over after repayment of the loan is kept by the property owner, estate or the heirs.