Reverse Mortgages and Interest Rate Risk

Posted: 17 May 2000

See all articles by Thomas P. Boehm

Thomas P. Boehm

University of Tennessee, Knoxville - Department of Finance

Michael Ehrhardt

University of Tennessee, Knoxville - Department of Finance

Abstract

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 magnitudes greater than the interest rate risk of other fixed-income securities.

JEL Classification: G21, M00

Suggested Citation

Boehm, Thomas P. and Ehrhardt, Michael, Reverse Mortgages and Interest Rate Risk. JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION, Vol 22 No 2 Summer, 1994, Available at SSRN: https://ssrn.com/abstract=5582

Thomas P. Boehm (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States
615-974-3216 (Phone)
615-974-1716 (Fax)

Michael Ehrhardt

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

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