Reverse Mortgage is a general term. There are proprietary reverse mortgages and the FHA Home Equity Conversion Mortgage (HECM) reverse mortgage. It is a financial product that when used correctly with a plan in place can be the fourth 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 a Reverse Mortgage loan and a Conventional loan is making a monthly payment. In the end both loans need to be repaid.
With a Conventional loan you must make a monthly payment. Interest accrues on the balance each month and you receive a statement to pay the interest due + any monies that go towards the principal balance. Very little is applied to the principal balance in the first 9-11 years. The loan balance decreases over time.
With a Reverse Mortgage loan you are not required to 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.