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Insurance Premium Structure of Reverse Mortgage Loans in Korea

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  • Seungryul Ma
  • Yongheng Deng

Abstract

We analyze the insurance premium structure of reverse mortgage loans in Korea. Our analyses provide a comparison between the reverse mortgage loans structured with constant monthly payments to those structured with graduated monthly payments which are indexed to the growth rate of consumer prices. Using the total annual loan cost measure, we find that, to the relatively younger borrowers, the graduated monthly payments approach is more efficient; while the constant monthly payments approach is more efficient to the older borrowers. Our sensitivity analyses confirm that the younger borrowers are more sensitive to the change of loan terms. Therefore, we propose that insurance premium structure should be more conservative to the relatively younger borrowers group. The results of this study can provide useful guideline to the operation of reverse mortgage system in Korea as well as in other countries.

Suggested Citation

  • Seungryul Ma & Yongheng Deng, 2006. "Insurance Premium Structure of Reverse Mortgage Loans in Korea," Working Paper 8568, USC Lusk Center for Real Estate.
    • Handle: RePEc:luk:wpaper:8568
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    References listed on IDEAS

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    1. Sally R. Merrill & Meryl Finkel & Nandinee K. Kutty, 1994. "Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 257-299, June.
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    6. Christopher J. Mayer & Katerina V. Simons, 1994. "Reverse Mortgages and the Liquidity of Housing Wealth," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 235-255, June.
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    8. David T. Rodda & Ken Lam & Andrew Youn, 2004. "Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low‐Cost Refinancing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 589-617, December.
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    Cited by:

    1. Tsay, Jing-Tang & Lin, Che-Chun & Prather, Larry J. & Buttimer, Richard J., 2014. "An approximation approach for valuing reverse mortgages," Journal of Housing Economics, Elsevier, vol. 25(C), pages 39-52.
    2. Yang, Jaehwan & Yuh, Yoonkyung, 2019. "Reverse Mortgages for Managing Longevity Risk in Korea," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 60(1), pages 21-40, June.
    3. Kim, Joseph H.T. & Li, Johnny S.H., 2017. "Risk-neutral valuation of the non-recourse protection in reverse mortgages: A case study for Korea," Emerging Markets Review, Elsevier, vol. 30(C), pages 133-154.
    4. Chen, Hua & Cox, Samuel H. & Wang, Shaun S., 2010. "Is the Home Equity Conversion Mortgage in the United States sustainable? Evidence from pricing mortgage insurance premiums and non-recourse provisions using the conditional Esscher transform," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 371-384, April.
    5. Shao, Adam W. & Chen, Hua & Sherris, Michael, 2019. "To borrow or insure? Long term care costs and the impact of housing," Insurance: Mathematics and Economics, Elsevier, vol. 85(C), pages 15-34.

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