When Should Retirees Tap Their Home Equity?

49 Pages Posted: 8 Sep 2020 Last revised: 30 Mar 2022

See all articles by Christoph Hambel

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research

Holger Kraft

Goethe University Frankfurt

André Meyer-Wehmann

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2022

Abstract

This paper studies a household's optimal demand for a reverse mortgage. In a stylized framework, we first show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and the discount the homeowner has to accept to take out a reverse mortgage on the one hand and the funding costs of a household on the other hand. Second, we study a rich life-cycle 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 unless her finanical wealth is small.

Keywords: reverse mortgage, consumption-portfolio decisions, optimal stopping, bio-metric risks, financial disasters

JEL Classification: D14, E21, G11, G21, J14, R21

Suggested Citation

Hambel, Christoph and Kraft, Holger and Meyer-Wehmann, André, When Should Retirees Tap Their Home Equity? (March 28, 2022). Available at SSRN: https://ssrn.com/abstract=3681834 or http://dx.doi.org/10.2139/ssrn.3681834

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

André Meyer-Wehmann

Goethe University Frankfurt

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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