When should retirees tap their home equity?

Arbeitspapier

This paper studies a household's optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly affected.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SAFE Working Paper ; No. 293

Classification and Topics

• Classification: Wirtschaft ; Household Saving; Personal Finance ; Macroeconomics: Consumption; Saving; Wealth ; Portfolio Choice; Investment Decisions ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination ; Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
• Subject: reverse mortgage ; consumption-portfolio decisions ; optimal stopping ; biometric risks ; financial disasters

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hambel, Christoph ; Kraft, Holger ; Meyer-Wehmann, André
• Event: Veröffentlichung
• (who): Leibniz Institute for Financial Research SAFE
• (where): Frankfurt a. M.
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/225489
• Last update: 10.03.2025, 11:42 AM CET