When should retirees tap their home equity?

Christoph Hambel, Holger Kraft and André Meyer-Wehmann

Journal of Banking & Finance, 2023, vol. 154, issue C

Abstract: This paper analyzes a household's optimal demand for a reverse mortgage. We study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. We find that the demand for reverse mortgages is particularly pronounced for cash-poor, house-rich retirees, and households with a strong bequest motive and low pension income. 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. If there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Furthermore, the probability to take out a reverse mortgage is hardly affected unless her financial wealth is small.

Keywords: Reverse mortgage; Consumption-portfolio decisions; Biometric risks; Financial disasters (search for similar items in EconPapers)
JEL-codes: D14 E21 G11 G21 J14 R21 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426623001656

DOI: 10.1016/j.jbankfin.2023.106967

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