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Journal of Undergraduate Research

Keywords

reverse mortgages, volatile interest market, present value

College

Physical and Mathematical Sciences

Department

Statistics

Abstract

In reverse mortgages, homeowners over the age of 62 take a loan out based on the equity of their home. While reverse mortgages can be beneficial for both the mortgager and mortgagee, there is also a great deal of risk involved because it is possible for the value of the loan to become larger than the equity on the home, depending on interest rates and life time of the mortgage. It is important to have a model that accurately predicts the risk associated with the mortgage. Recognizing and appropriately managing risk is becoming increasingly important as the “baby boom” generation reaches retirement age, live longer lives, and take out more and more reverse mortgages. Through a reverse mortgage they will be able to get the cash they need to provide the necessities of life. Because there is an ever increasing number of reverse mortgages in the United States (there has been nearly 500% growth since 20011) creating a more accurate model will help in preventing another source of risk mismanagement.

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