Reverse Mortgages and Interest Rate Risk

Thomas P. Boehm and Michael C. Ehrhardt

Real Estate Economics, 1994, vol. 22, issue 2, 387-408

Abstract: We develop and apply a valuation model that quantifies the interest rate risk inherent in fixed‐rate reverse mortgages. Consistent with intuition, our results show that the interest rate risk of a reverse mortgage is greater than that of either a typical coupon bond or a regular mortgage. Somewhat surprisingly, we find that this difference in interest rate risk is extremely large. In fact, the interest rate risk of a reverse mortgage often is several orders of magnitude greater than the interest rate risk of other fixed‐income securities.

Date: 1994
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