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Reverse mortgages: What homeowners (don’t) know and how it matters

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  • Davidoff, Thomas
  • Gerhard, Patrick
  • Post, Thomas

Abstract

Reverse mortgages allow elderly homeowners to unlock and consume home equity without leaving their homes. Relative to the number of elderly homeowners with limited financial resources, the take-up rates of reverse mortgages are low. To understand the low take-up rates we first survey U.S. homeowners aged 58 and older assessing their knowledge (literacy) about the most popular reverse mortgage product, the Home Equity Conversion Mortgage (HECM). Next, we study the relationship between knowledge and the intention to use a HECM. Awareness of reverse mortgages is high, but knowledge of contract terms is limited. More knowledgeable homeowners and those with peers who have a reverse mortgage express greater intention to use such a product. Respondents who would benefit most from reverse mortgages (those with low incomes and limited savings) express greater intention to use reverse mortgages, but lack knowledge of the contract terms. Our findings suggest that take-up rates might be increased through improving knowledge about contract terms or changing the product’s design to make it easier to understand in the first place.

Suggested Citation

  • Davidoff, Thomas & Gerhard, Patrick & Post, Thomas, 2017. "Reverse mortgages: What homeowners (don’t) know and how it matters," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 151-171.
    • Handle: RePEc:eee:jeborg:v:133:y:2017:i:c:p:151-171
    DOI: 10.1016/j.jebo.2016.11.007
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    3. Gilles E. Gignac & Elizabeth Ooi, 2022. "Measurement error in research on financial literacy: How much error is there and how does it influence effect size estimates?," Journal of Consumer Affairs, Wiley Blackwell, vol. 56(2), pages 938-956, June.
    4. Mohammed Ishaq Mohammed & Noralfishah Sulaiman & Dahiru Adamu, 2018. "Dimensionality and Reliability of the Determinants of Reverse Mortgage Use Intention," Traektoriâ Nauki = Path of Science, Altezoro, s.r.o. & Dialog, vol. 4(2), pages 1013-1023, February.
    5. Murray, Tim, 2019. "Defined benefit pensions and homeownership in the post-Great Recession era," MPRA Paper 92601, University Library of Munich, Germany.
    6. Ismael Choinière-Crèvecoeur & Pierre-Carl Michaud, 2023. "Reverse Mortgages and Financial Literacy," CIRANO Working Papers 2023s-06, CIRANO.
    7. Baulkaran, Vishaal & Jain, Pawan, 2024. "Home equity and retirement funding: Challenges and opportunities," Global Finance Journal, Elsevier, vol. 61(C).
    8. Badescu, Alexandru & Quaye, Enoch & Tunaru, Radu, 2022. "On non-negative equity guarantee calculations with macroeconomic variables related to house prices," Insurance: Mathematics and Economics, Elsevier, vol. 103(C), pages 119-138.
    9. Alessandro Piergallini, 2020. "Demographic change and real house prices: a general equilibrium perspective," Journal of Economics, Springer, vol. 130(1), pages 85-102, June.
    10. Donoso, José & Ruiz, José Luis & Tapia, Pablo, 2019. "The social and economic effects of introducing reverse mortgages in Chile," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    11. Hanewald, Katja & Bateman, Hazel & Fang, Hanming & Wu, Shang, 2020. "Is there a demand for reverse mortgages in China? Evidence from two online surveys," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 19-37.
    12. Florian Bartsch & Florian Buhlmann & Karolin Kirschenmann & Carolin Schmidt, 2021. "Is There a Need for Reverse Mortgages in Germany? Empirical Evidence and Policy Implications," EconPol Policy Reports 31, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    13. Francis Wong, 2024. "Taxing Homeowners Who Won’t Borrow," CESifo Working Paper Series 11185, CESifo.
    14. Wei Han & Ping Wang & Hongjie Dong, 2020. "Influence of Egoistic and Altruistic Bequest Motives on the Willingness to Participate in Reverse Mortgages in China," Asian Economic Journal, East Asian Economic Association, vol. 34(4), pages 430-463, December.
    15. Hambel, Christoph & Kraft, Holger & Meyer-Wehmann, André, 2023. "When should retirees tap their home equity?," Journal of Banking & Finance, Elsevier, vol. 154(C).
    16. James Conklin & Kristopher Gerardi & Lauren Lambie-Hanson, 2022. "Can Everyone Tap Into the Housing Piggy Bank? Racial Disparities in Access to Home Equity," FRB Atlanta Working Paper 2022-17, Federal Reserve Bank of Atlanta.
    17. Cocco, Joao F. & Lopes, Paula, 2019. "Aging in place, housing maintenance and reverse mortgages," LSE Research Online Documents on Economics 100835, London School of Economics and Political Science, LSE Library.
    18. Mohammed Mohammed Ishaq & Sulaiman Noralfishah, 2018. "Determinants of Reverse Mortgage Usage in Malaysia," Real Estate Management and Valuation, Sciendo, vol. 26(3), pages 5-23, September.
    19. KUNDID NOVOKMET Ana & MATKOVIĆ MARTINA, 2020. "Anticipating A Reverse Mortgage Adoption In Croatia," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 15(3), pages 132-151, December.
    20. Junxue Jia & Jia Gu & Guangrong Ma, 2021. "Real Estate Boom and Firm Productivity: Evidence from China," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(5), pages 1218-1242, October.
    21. Hambel, Christoph & Kraft, Holger & Meyer-Wehmann, André, 2020. "When should retirees tap their home equity?," SAFE Working Paper Series 293, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Reverse mortgage demand; Reverse mortgage knowledge; Reverse mortgage literacy;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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