A reverse mortgage is a simply a mortgage repayment plan back to a homeowner who has completed paying off their mortgage loan on their home, or someone who has a great deal of equity built up in their home; usually an elderly person. The bank or financial institution will make incremental payments or a large lump sum payment back to the homeowner. A company that does a mortgage payment plan like this has to pay the equity back to the homeowner over time, in a few payments, or just one large payment.
Reverse mortgages are primarily used by older individuals who are willing to allow their home's equity to pay them back for their many years of mortgage payments to their bank or mortgage company. The homeowner is selling out the equity in a sense to someone who is interested in the property or someone who is interested in recouping interest on a reverse mortgage loan. For example, in a property that is completely paid off, the individual who owns the home is giving someone else ownership in their property which may be used as a lien against their property by receiving the reverse mortgage payments if the loan is not paid back, or if the borrower dies without their relatives paying back the loan.
If the homeowner dies, the property amount paid by the reverse mortgage company must be paid back either through a lien being used to foreclosed on the property if necessary, or just through repayment. Lets say a deceased reverse mortgage recipient's loved one made the payment back to the reverse mortgage company in order to not loose the property, then they would have prevented that company from foreclosing on the home for the unpaid loan. Relatives could be interested in the property; they might not want to loose a $300,000 property to a $100,000 reverse loan, so they pay back the company that made the loan, and keep the home instead of letting the company take ownership through their lien that they use to foreclose the home.
In my honest opinion, a reverse mortgage is best for older homeowners who are by themselves with little or no relatives and are wanting to get some money back out of their home without selling it before they pass away; but their home needs to be paid off or has a large amount of untapped equity in it in order to get a such a loan. Assuming that once they have passed on the home would be owned by the reverse mortgage company or individual that was buying ownership in their home. A program like this can be beneficial in our society, however, most homeowners would not qualify for a mortgage of this type.
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