Journal of Banking & Finance Vol. 154 2023
When should retirees tap their home equity?
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.
- DOI
- 10.1016/j.jbankfin.2023.106967
- Volume
- 154
- Pages
- 106967
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib