When Should Retirees Tap Their Home Equity?

54 Pages Posted: 8 Sep 2020 Last revised: 19 Jul 2023

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: 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

Hambel, Christoph and Kraft, Holger and Meyer-Wehmann, André, When Should Retirees Tap Their Home Equity? (July 19, 2023). 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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