When Should Retirees Tap Their Home Equity?
54 Pages Posted: 8 Sep 2020 Last revised: 19 Jul 2023
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When Should Retirees Tap Their Home Equity?
When Should Retirees Tap Their Home Equity?
Date Written: July 19, 2023
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.
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. 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
JEL Classification: D14, E21, G11, G21, J14, R21
Suggested Citation: Suggested Citation