The Wall Street Journal does a good job of discussing some of the issues in this article titled Three Warnings for Hard Times. The article discusses three areas of borrowing funds that should be approach with caution - 401Ks and retirement funds, life insurance and settlements, and reverse mortgages. Let's take a look at the reverse mortgage issues -
If you are over age 62 and have equity in your house, a reverse mortgage might sound intriguing. With a reverse mortgage, you get to convert the equity in your house to cash. You don't have to make interest or principal payments during the life of the loan.
The catch is that the loan costs can be steep. Also, interest is added to the principal, making them "rising debt" loans.
"The bottom line is that reverse mortgages are an expensive option that may prematurely deplete your home equity," Finra said.
A reverse mortgage may be right for you. But you need to evaluate a number of factors, including your health, your spouse's health and other sources of income. What are some alternatives? According to Finra, you could sell your house and then downsize or rent, or take out a home-equity loan. Any of those tactics could unlock the equity in your home without the cost of a reverse mortgage.
One perverse aspect to a reverse mortgage is that one is gambling that ones life ends before ones money does. There is also a large gamble that one needs the equity today more than tomorrow. This mindset caused many problems with HELOCs and Cash-out Refis during the Great Housing Bubble. Hopefully reserve mortgages will not follow suit. Although it is too early to tell all of the problems for both the lenders and the borrowers may face down the road.