When Should Retirees Tap Their Home Equity?
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Datum
2020-10-28
Autor
Hambel, Christoph
Kraft, Holger
Meyer-Wehmann, André
SAFE No.
293
Metadata
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Zusammenfassung
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.
Forschungsbereich
Household Finance
Schlagworte
reverse mortgage, consumption-portfolio decisions, optimal stopping, biometric risks, financial disasters
JEL-Klassifizierung
D14, E21, G11, G21, J14, R21
Thema
Consumption
Monetary Policy
Household Finance
Monetary Policy
Household Finance
Beziehungen
1
Publikationstyp
Working Paper
Link zur Publikation
Collections
- LIF-SAFE Working Papers [334]