What is a reverse mortgage?
Reverse Mortgages are designed to enable elderly homeowners to convert the equity in their homes to monthly streams of income, a lump sum payment and/or lines of credit. Loan proceeds for a reverse mortgage are paid out according to a payment plan selected by the borrower.
Unlike a traditional “forward” residential mortgage, which is repaid in periodic payments, a reverse mortgage is repaid in one payment, after the death of the borrower or when the borrower no longer occupies the property as a principle residence.
The borrower may occupy the property until the mortgage becomes due and payable. The reverse mortgage will become due and payable when the borrower dies, the property is no longer the borrower’s principle residence, the borrower does not occupy the property for 12 consecutive months for health reasons or the borrower violates the mortgage covenants.
A violation of a mortgage covenant can occur if the borrower fails to maintain adequate homeowners insurance and/or applicable flood insurance. A violation can also occur if the borrower fails to pay the local/state property taxes.
When the mortgage becomes due and payable, the property can be sold or refinanced by the borrower or the borrower’s estate to pay off the outstanding balance on the mortgage.
In addition to Mark's excellent answer above, seniors should be very wary of anybody encouraging them to take out a reverse mortgage in order to invest the proceeds. Some seniors have been taken advantage of in this manner. It rarely makes sense to borrow money to invest and that is what happens when Reverse Mortggage proceeds are accesssed for that purpose.
Counseling from an independent HECM counselor is required and family members are encouraged to participate. When the property is sold, the reverse mortgage is paid in full--just like any other mortgage would be.