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Millenials Do Home Equity Their Own Way

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

Perhaps millennials prioritize having fun more than their baby boomer and Generation X parents and siblings. Perhaps this generation’s financial preferences have been shaped by record-low mortgage rates and soaring house values.

Whatever the reason, young adults aged 25 to 40 have a drastically different attitude regarding home equity than older adults.

According to a recent survey, 14% of millennial mortgage holders indicated that they would use home equity to fund a trip, compared to 4% of Generation X (aged 41 to 56) and 3% of baby boomers (ages 57 to 75).

Additionally, 10% of millennials said they would withdraw funds from their homes to spend on non-essential purchases such as electronics or a boat. Only 3% of Generation Xers and baby boomers believe this is a good idea.

However, only 49% of millennials said they would utilize equity to upgrade their houses, compared to 64% of Generation X and 66% of baby boomers.

According to Michael Golden, co-founder and co-CEO of @properties, a 4,000-agent real estate organization based in Chicago, the discrepancies in sentiments are unsurprising. Millennials are believed to value work-life balance more than their parents and older siblings do.

“They’re a little bit more balanced,” Golden explains. “They value life events more.” They’re eager to spend money in novel ways and to leverage their home equity in novel ways.”

Traditionalists advise prudence when it comes to house equity. According to Melinda Opperman, president of Credit.org, many homeowners regretted moving cash out of their homes during the boom that preceded the Great Recession.

“Building wealth in a home is a long, deliberate process,” Opperman explains, “and the process accelerates the longer one stays in a property.” “In general, we would advise against cashing out equity unless it is used to improve the property, increasing its value and expediting the process of restoring equity.”

A significantly different rate scenario

One component of the generational split is self-evident: Mortgage rates for millennials are at historically low levels as they enter their home-buying years.

On the other side, baby boomers faced 30-year mortgage rates of up to 18 percent in the early 1980s. In the 1990s, Gen Xers faced an unemployment rate of roughly 9%. Between January 1, 2010 and January 1, 2020, the average rate on a 30-year loan was slightly over 4%, a figure that millennials barely recall.

Following the COVID-19 pandemic, 30-year mortgage rates went below 3% for the first time in history. Traditional debt-reduction principles may appear less critical today that borrowing is so inexpensive.

Golden continues, “You’re now borrowing in the low twos or low threes.” “When interest rates are so low, the debtor’s thinking changes dramatically. ” Being in debt is understandable.”

Another reality is that Americans aged 25 to 40 are more focused with living in the moment than with saving for the future.

According to Golden, millennials have a “longer runway.” “They are not contemplating retirement; they are currently engaged in a construction project.”

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The cost of housing is soaring.

Another factor influencing millennial homeowners’ attitudes toward home equity is their good fortune in purchasing amid the country’s hottest real estate market. According to the most recent S&P CoreLogic Case-Shiller home price index, property values climbed by a record 19.7 percent in the United States between July 2020 and July 2021.

Home equity may be accessed only if the homeowner possesses it, and homeowners posses it in record amounts. Americans have $9.1 trillion in “tappable” home equity as of mid-2021, according to mortgage data firm Black Knight.

“The recent increase in home values may have impacted some people’s perceptions of home equity,” says Greg McBride, chief financial analyst at Bankrate. “Those who recall the housing collapse and the resulting strain on severely leveraged homeowners are likely to be more hesitant to tap equity until absolutely necessary.”

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The following is a list of reasons to withdraw money from your home, along with advise on whether or not this is a wise idea:

Upgrades and repairs to the home are a green flag.

Baby Boomers and Generation Xers support this argument for equity access. Financial analysts had little to say. Home improvements are likely to last years, which correlates to the period required to pay off a mortgage. Improvements to the kitchen and bathroom are a no-brainer.

Non-essential renovations, such as adding a swimming pool or a game area, will not always increase the value of the home. On the other hand, a mortgage is the most affordable option if you require a new air conditioner or an enhanced electrical system.

Consolidation of debt is indicated by a yellow flag.

If you have credit card debt with interest rates in the double digits, it may make sense to refinance with historically low-cost mortgage financing. However, there is one significant limitation to this strategy: use cash from your house to pay off your credit cards only if you are not adding to your credit card debt.

“Whether or not you can use your home equity to combine your debt is contingent upon addressing the root cause of the problem,” McBride advises. “A pattern of excessive spending may result in the recurrence of credit card debt and the accumulation of home equity debt.”

According to Opperman, homeowners who use their home equity as a lifeline may end up digging themselves a deeper hole in the long run. “You only get one chance to cash out that equity,” she explains. If you increase your spending following your cash-out refinance, she says, you’ll face a “second reckoning,” but this time with less cushion of home equity to cushion the fall.

When it comes to investing, this is a red flag.

Millennials are more inclined to invest their home equity than prior generations. While 26% of that age group approved of the proposition, only 17% of Gen Xers and 10% of baby boomers approved.

The calculus of investing is sophisticated, much like the calculus of debt repayment via leveraged home equity. According to financial experts, it is acceptable to use low-cost mortgage funds to supplement retirement savings and to invest the returns in a well-diversified portfolio. There is a compelling case to be made for supplementing your retirement savings with low-cost mortgage funds.

On the other hand, if you’re considering using equities to day-trade stocks or profit from the cryptocurrency boom, you should rethink your strategy. While such a risk may pay off, it is also possible to lose a significant amount of money.

Paying off student loans is a yellow flag.

This is a bit of a grey area. If you have private student loans, it may make sense to pay them down using your home equity. In comparison to government student loans, private student loans offer higher interest rates and less flexibility.

On the other hand, if you have federal loans, McBride notes that you are not required to repay them immediately. Federal student loans, with their reasonable interest rates and income-based repayment schedules, may not be a crippling type of debt.

If you’re going on vacation or purchasing electronics, the red light will illuminate.

Here’s one where financial professionals concur with the wise elders of the baby boomers and Gen X.

Consider the following: the duration of your home loan is 15 or 30 years, as real estate is a long-term investment that will bring years of enjoyment and almost certainly increase in value. On the other hand, a Caribbean vacation or a game console will be forgotten after decades of repayment. If a cash-out refinance is your only option for financing a vacation or other large-ticket item, it’s preferable to delay the purchase.

A red flag for failing to pay household payments on time.

Millennials are more likely to use their home equity to pay down debt than prior generations. In comparison to only 17% of Generation X and 14% of baby boomers, 28% of 25- to 40-year-olds stated they would withdraw cash for such purpose.

Yes, many millennials face a tough economic reality: during the previous decade, home price rise has significantly outpaced wage growth. Numerous young people are also plagued by substantial school loan debt.

However, there is one area in which financial counselors’ advice parallels the knowledge of prior generations. Borrowing for 30 years in order to pay for child care, groceries, and auto maintenance this month is not a financially viable option. If this describes your situation, consider increasing your income or decreasing your spending.

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