Perhaps Millennials enjoy having fun more than their Baby Boomer parents and Generation X siblings. The financial tastes of this cohort may have been shaped by historically low mortgage rates and the soaring house prices.
Whatever the reason, Americans between the ages of 25 and 40 display significantly different attitudes about exploiting their home equity than older homeowners.
According to a recent Bankrate poll, 14% of millennial mortgage holders say they would use their home equity to finance their vacations, compared to just 4% of millennials (41-56) and 3 % of baby boomers (aged 57 to 56) 75).
And 10 percent of millennials say they would take money out of their homes for non-essential purchases, like electronics or a boat. Only 3% of Gen Xers and Baby Boomers say it sounds like a good idea.
On the flip side, only 49% of Millennials say they would use equity for home improvement, compared to 64% of Gen Xers and 66% of Baby Boomers.
Michael Golden, co-founder and co-CEO of @properties, a 4,000-agent real estate brokerage in Chicago, says the different attitudes come as no surprise. It has long been said that millennials value work-life balance more than their parents and older siblings.
“They’re a little more balanced,” Golden says. “Life experiences are a bit more important to them. They’re willing to spend money in a different way, and they’re willing to leverage their home equity in a different way.
Traditionalists call for caution when it comes to tapping into a home’s equity. Melinda Opperman, president of Credit.org, recalls that many homeowners regretted taking money out of their homes during the boom that preceded the Great Recession.
“Building wealth in a home is a long and deliberate process, and that wealth creation increases the longer you stay in a home,” says Opperman. “In general, we don’t advise anyone to cash in that equity unless they are using it to improve the property, thereby increasing the value of the home and rebuilding equity more quickly.”
A very different rate picture
Part of the generation gap is simple: Millennials have entered their home buying years with mortgage rates at microscopic levels.
In contrast, baby boomers lived with 30-year mortgage rates exceeding 18% in the early 1980s. Generation X experienced rates hovering at 9% in the 1990s. Millennials barely remember mortgage rates. 5% – From January 1, 2010 to January 1, 2020, the average rate on a 30-year loan was just over 4%.
Then came the COVID-19 pandemic, and 30-year mortgage rates fell below 3%, their lowest levels ever. With borrowing so cheap, the old rules for avoiding debt might seem less relevant.
“Now you’re borrowing in the 2’s or the 3’s,” Golden says. “When interest rates are so low, the psychology of debt is very different. It makes sense to have debt.
Another reality: Americans between the ages of 25 and 40 are focusing on their lives rather than saving for the distant future.
“Millennials have a longer trail,” Golden says. “They don’t think about retirement; they are now in construction mode.
Home values are skyrocketing
Another factor that plays a big part in how Millennials feel about home equity is that they were lucky enough to buy during the hottest real estate market in U.S. history. Nationally, home values jumped a record 19.7% from July 2020 to July 2021, according to the latest S&P CoreLogic Case-Shiller Home Price Index.
Tapping into a home’s equity is only possible if you have equity and owners have it in unprecedented amounts. According to mortgage data firm Black Knight, Americans had more than $ 9,100 billion in “usable” real estate equity as of mid-2021.
“Some of the attitudes toward home equity may be influenced by the recent surge in home prices,” says Greg McBride, chief financial analyst at Bankrate. “Those who remember the real estate crisis and how heavily leveraged homeowners were squeezed are probably more reluctant to tap equity unless absolutely necessary. “
Why you should leverage equity – and why you shouldn’t
Here is a breakdown of the reasons for withdrawing money from your home, along with some tips on the financial relevance of that justification:
Home improvements and repairs: Green light.
Baby boomers and Generation X are giving the green light for this reason to exploit fairness. Not a lot of arguments from financial experts. Home improvements are likely to last for years, a time frame that matches the mortgage debt horizon. Kitchen renovations and bathroom updates are a no-brainer.
But non-essential projects, like a swimming pool or game room, won’t necessarily reward you with a corresponding increase in property value. However, if you need a new air conditioner or an updated electrical system, a mortgage is the cheapest money you’ll find.
Consolidation debt: Yellow light.
If you have credit card debt and are paying double-digit interest rates, it might be a good idea to swap expensive revolving debt for historically cheap mortgage debt. With this strategy comes an important caveat, however: Withdraw money from your home to pay off credit cards only if you are not simply going to increase your credit card debt.
“Using home equity to do debt consolidation really depends on whether the root cause of the debt has been addressed,” says McBride. “An overspending model could lead to credit card debt remaking, as well as carrying home equity debt.”
Opperman says homeowners who use their home equity as a lifeline can dig themselves deeper in the long run. “You can only cash this equity once and then it’s spent,” she says. If you follow your withdrawal refi with more spending, you’ll face what she calls a “second count” – but this time with less net worth cushion to cushion the fall.
Investment: Yellow light.
Millennials are more likely than other generations to use their home equity to invest. While 26% of this age group said they liked the idea, only 17% of Gen Xers and 10% of Baby Boomers approved of the idea of redirecting their home equity to another investment.
As with using a home’s equity to pay off debt, the math around investing is nuanced. If you want to tap into cheap mortgage money to fatten up your retirement savings and put that product into a well-diversified portfolio, finance professionals give their blessing. There is a strong case for using cheap mortgage money to consolidate your retirement account.
On the flip side, if you are aiming to mine stocks for the stocks of the day or play the cryptocurrency boom, the smart advice is to think again. Such a bet could pay off, or you could lose big.
Student loan repayment: yellow light.
This one is a bit of a gray area. If you owe student loans to private lenders, it may be a good idea to repay them using the equity in your home. Unlike federal loans, private student loans have higher rates and less flexibility.
On the flip side, if you have federal loans, you don’t have to rush to pay them off, McBride says. Their reasonable interest rates and income-based repayment plans mean federal student loans may not be a crippling form of debt.
Going on vacation or buying electronics: Red light.
Here’s one where financial experts agree with those wise wise people of the Baby Boomer and Gen X.
Think of it this way: Your mortgage term is 15 or 30 years because real estate is a long-term asset that will give you years of use and almost certainly grow in value. A Caribbean cruise or a game console, on the other hand, will be long forgotten even if you pay for it for decades. If a withdrawal refusal is your only option to pay for a vacation or other expensive item, it’s best to put the purchase on hold.
Track household bills: Red light.
Millennials are more likely than other generations to tap into their home equity just to pay the bills. A total of 28% of 25- to 40-year-olds say they would withdraw money for this purpose, compared with just 17% of Gen Xers and 14% of Baby Boomers.
Yes, the economic reality is harsh for many millennials: House price appreciation has far outpaced wage gains over the past decade. And many young adults are struggling with heavy student loans.
However, this is another area where the advice of financial planners aligns with the wisdom of older generations. Borrowing for 30 years to pay for this month’s child care, groceries and auto repairs is not a sustainable way of life. If this is your case, look for ways to increase your income or tighten your budget.
Bankrate.com commissioned YouGov Plc to conduct the investigation. The total sample size was 3,657 adults, 1,041 of whom had a mortgage. The fieldwork was conducted from July 26 to 29, 2021. The survey was conducted online and meets rigorous quality standards. It used a non-probability sample using both initial quotas during collection and then a downstream weighting scheme designed and proven to provide nationally representative results.