The pricing analysis of reverse mortgage with redemption option

Yanxia Zhu and Li Gong

Abstract

The paper builds the actuarial pricing models of reverse mortgages. The CIR model and jump diffusion model are used to describe the stochastic processes of interest rate and the growth rate of housing value, respectively, and through Monte Carlo simulation, the annuity payments of reverse mortgages with redemption option and no redemption option are obtained. An important conclusion is that the embedment of the redemption option will reduce the level of payment of reverse mortgage to a large extent; however, the payment still can supplement the social security benefit.