Premium
Reverse Mortgages and Interest Rate Risk
Author(s) -
Boehm Thomas P.,
Ehrhardt Michael C.
Publication year - 1994
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00639
Subject(s) - interest rate , interest rate risk , economics , floating interest rate , fixed income , econometrics , risk free interest rate , mortgage underwriting , financial economics , bond , valuation (finance) , actuarial science , monetary economics , finance , mortgage insurance , casualty insurance , insurance policy
We develop and apply a valuation model that quantifies the interest rate risk inherent in fixed‐rate reverse mortgages. Consistent with intuition, our results show that the interest rate risk of a reverse mortgage is greater than that of either a typical coupon bond or a regular mortgage. Somewhat surprisingly, we find that this difference in interest rate risk is extremely large. In fact, the interest rate risk of a reverse mortgage often is several orders of magnitude greater than the interest rate risk of other fixed‐income securities.