If you're younger—say, in your 60s—and facing financial difficulties, you should probably avoid taking out a reverse mortgage. Odds are that such a loan would quickly swallow your credit line and sacrifice your home equity without being a long-term solution to your problems.

If you can afford the monthly payments, a home-equity loan is a less drastic alternative. Or perhaps a family member could fund a personal reverse mortgage, in which he or she covers living expenses in exchange for a fair amount of equity in your house paid back when you die. Another option is to sell the home and use some of the proceeds to buy a smaller, cheaper one.

To avoid making a grievous mistake, talk first with a reverse-mortgage counselor (HUD maintains a list of agencies it has approved for housing counseling). He or she will explain how the loan works, what the impact would be on your future finances, and alternative sources of money. HUD requires such counseling for an HECM loan, but it is not mandatory for other types of reverse mortgages.

Finding an honest reverse-mortgage lender is critical. Before doing business with any company, make sure that it is a member of the National Reverse Mortgage Lenders Association and that it adheres to its code of conduct. Also check with your local Better Business Bureau for complaints against lenders. Compare the interest rates and terms offered by two or three reverse-mortgage lenders in your area. And most important, take your time before choosing a mortgage or a lender. If buying a house was the biggest financial decision in your life up until now, then mortgaging it back to the bank shouldn't be a smaller one.