A reverse mortgage is much like either a line of credit, with a pin number to access the funds or money received in one lump sum or a set amount received each month. However, the money borrowed is not required to be paid back until the people who took the loan have either sold the house, are unable to live in the home for a period of one year or have passed away. The way to pay off a reverse mortgage is for the house to be sold before or after the occupants pass away, OR an heir may decide to take out their own mortgage to pay off the reverse mortgage to gain ownership of the house.
My elderly Aunts (two sisters) took out a reverse mortgage because they needed money to finance their lives in their elder years (they were in their mid 80's), so they decided to use the equity in their house to finance the rest of their lives. It was a godsend for them and their lifestyle, however it was a very poor choice for the family beach house that had been in the family since 1944. Because when my aunt's died, the reverse mortgage, the monthly interest and administration fees totaled in excess of $300K (the house was valued at $650K) and none of us wanted to take on that expense, so regretfully, the house was sold and the proceeds went to the heirs.
I think a reverse mortgage is great for the people who own the house, but not so good for the heirs of a house that was loved by family for four generations. My Aunts could have easily rented the house to finance an assisted living situation so the house remained in the family, but they were stubborn and wanted to live in a place they could no longer afford, especially when the taxes reached $12K per year.
When the last loan holder passes away, the house is supposed to be sold within six months of their death or refinanced before foreclosure proceedings begin. The bank is only allowed to sell the house for the amount of the loan plus legal fees. So, for homes that still have equity, the equity is completely lost into thin air. Some homes decrease in value and the bank has to take what it sells for to appease at least as much of the loan as possible. The heirs are never financially responsible for the reverse mortgage payback unless they want to take their own loan out to pay off the reverse mortgage loan.
Like others have stated, there are conditions to the loan, like agreeing to keep homeowner's insurance, taxes paid and upkeep on the home. If the taxes or the insurance is not paid, the reverse mortgage company will be contacted and they will use the reverse mortgage funds to pay the debts. But, if those bills are not paid and there is no more equity for the reverse mortgage to use to pay them, foreclosure proceedings will commence. So, it can be a pretty risky situation for the homeowners if care is not taken on how to use the funds for the reverse mortgage.
After my second Aunt passed away, I was permitted to take two three month extensions to sell the house....the initial 6 months, plus two 3 month extensions. The house still did not sell and foreclosure proceedings began. I pleaded with the reverse mortgage company to give me time to sell the house, as there was over $300K in equity in the house and the heirs have a vested interest in the sale as much as the reverse mortgage company does. I proved that the house was in tip top condition, I proved that I had a contract with a licensed real estate agent, I even made them look up the house on Realtor.com so they could see how gorgeous it was staged. They were convinced that I was not squatting in the house and they held off on taking possession of the house. After all, I told them we were partners, let me keep the house in order; lights on, water running, a/c and heated. They were gracious enough to allow me to sell the house. After firing the realtor from hell, another realtor sold the house in 60 days. YAY.