A reverse mortgage is a loan, just like any other loan. And like any other loan, it must be paid back eventually. It is not free money. One of the differences between a reverse and a traditional mortgage is that a reverse only gets paid back lump sum when the home is sold or the senior moves out permanently - unlike a traditional mortgage where you have to make monthly mortgage payments or the bank will foreclose on you. That is why it is reserved only for seniors 62 and up.
you still own the home and can sell it at any time. there is no prepayment penalty. and if there is any profit from the sale, after you pay off the loan, that money is yours. the bank cannot evict you even if your equity runs out and you owe more than the house is worth because it is FHA insured; but you must abide by the conditions of the loan which are: pay your property taxes, homeowners insurance, maintain your property, and continue to live there as a primary residence.
It was designed precisely for seniors who are cash poor but house rich. It is meant mostly for seniors who may not qualify for a regular loan otherwise because they are on Social Security or SSI and cannot afford to make monthly mortgage payments; and allows them to borrow money now so they can improve the quality of their lives.
When the person dies, the house goes to the estate. The heirs have to decide if they want to keep it or sell it. If they want to keep it, they need to refinance the loan into their own names and pay off the reverse mortgage. If they choose to sell, they keep the profit after the loan is paid off. If the house is upside down, the heirs are not personally liable for the loan because only the home stands for the loan (non-recourse).
The two biggest criticisms are the closing costs and the negative amortization. The closing costs CAN seem high because it is an FHA loan and FHA requires mortgage insurance even if you have more than 20% equity in the home. Otherwise the closing costs are very similar to any other loan. The negative amortization means that every month that you don't make a payment (you can, if you want to), the loan balance increases. Over time, the loan balance can become greater than the value of the home, especially in an economic downturn as we are seeing currently. This does NOT affect the senior per se as long as it is their permanent residence and they abide by the conditions mentioned above. It typically just affects the heirs if they were expecting some big inheritance. But one would think that if they wanted their perceived inheritance to remain intact, they would have offered to help their senior relative with their living expenses so that the home could remain free and clear.
I specialize in reverse mortgages (CA)