Young Owners Likely to Tap Equity for Spending

NEW YORK – Thanks to the pandemic-fueled housing boom, Americans are sitting atop a massive pile of home equity. As a result, many face a decision: Should they borrow against their homeownership stake to support spending for various goals?

To gain insight into how homeowners view their equity wealth, Bankrate asked for their opinions. Among current homeowners, fully 55% see home improvements or repairs as a good reason to tap home equity. While that's considered a financially responsible use, some homeowners have favorable opinions of tapping equity for more discretionary, debatable uses: 7% selected borrowing against the house to take a vacation, and 6% selected using equity to fund purchases of electronics, a boat or other nonessential big-ticket items.

At the other end of the risk spectrum, 18% of homeowners said there's no good reason to tap home equity for cash at all.

The opinions about using housing wealth diverge in particular among generational lines. Younger homeowners – many of whom drained their savings to come up with down payments – are more likely to approve of tapping equity for consumer spending. But older homeowners – who've had decades to fatten up their cash cushions and investment accounts – are much less likely to feel it wise to turn to their equity.

How different groups feel about using home equity

Among U.S. homeowners, home improvements or repairs was the most-cited reason for using home equity (55%). Other than that, though, the opinions about good reasons to cash in one's homeownership stake vary among the generations, genders and — to a lesser extent — income groups.

How different generations feel about tapping home equity

Older homeowners are less likely to see wisdom in tapping home equity at all, with 23% of baby boomer (ages 60-78) and 19% of Gen X homeowners (ages 44-59) saying there's no good reason for a homeowner to access built-up home equity for cash, compared to 9% of millennial homeowners (ages 28-43).

To delve further into the results:

• While 58% of boomers and 61% of Gen X homeowners say tapping home equity for repairs and renovations is a good reason for accessing home equity, just 46% of millennials said so.
• 30% of millennial homeowners approve of tapping home equity to make other investments, compared to just 8% of boomers and 13% of Gen X homeowners.
• Only 2% of boomer and 6% of Gen X homeowners think it's a good idea to tap equity to fund a vacation, compared to 14% of millennial homeowners.
• Fully 11% of millennial homeowners said nonessential big-ticket purchases are a good reason to access home equity, compared to just 4% of Gen X and 2% of boomer homeowners.
• 23% of millennial homeowners said keeping up with regular household bills is a good reason to access equity.

How income affects feelings about tapping home equity

The survey found little variation in responses by income. Among homeowners earning less than $50,000 annually, 17% said there is no good reason to tap home equity, compared to 16% of those earning $50,000 to $79,999, 18% of homeowners making $80,000 to $99,999, and 17% of those earning $100,000 or more. However, among those who didn't disclose their incomes, 25% said there is no good reason to tap home equity.

There was one outlier in this category: Among those making less than $50,000, fully 23% said keeping up with regular household bills is a good reason to tap equity, compared to just 11% of those making $100,000 or more.

When you should and shouldn't tap home equity

If you tap into your home equity through a home equity loan or home equity line of credit (HELOC), you'll get access to a big wad of cash – and no restrictions on how you can spend the money. That's a lot of responsibility. To help you make sense of it, here are what are generally considered good reasons to use equity (green light), so-so reasons (yellow light) and bad reasons (red light).

Green light: Good uses of home equity

Home improvements. Boomers and Generation Xers give the thumbs-up to this reason for tapping equity, especially as homeownership costs have soared of late (over $18,000 annually, according to Bankrate's Hidden Costs of Ownership Study). Not much argument from financial experts here. Remodels, repairs and upgrades are likely to last for years, a timeframe that matches the horizon of mortgage debt. Kitchen renovations and bathroom updates are no-brainers, as they often increase the resale value of your home.

But non-essential projects, such as a swimming pool or a pickleball court, 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 home equity loan is certainly preferable to carrying a credit card balance, as it's a far less expensive form of borrowing.

Debt consolidation. If you're carrying credit card debt and paying interest rates north of 20%, it could make sense to swap out expensive revolving debt into a cheaper home equity loan. After all, as of Bankrate's July 31 national survey of lenders, the average APR on credit card balances was nearly 21%, while rates for home equity loans and HELOCs stood, respectively, at 8.59% and 9.18%.

This strategy comes with a big caveat, however: Pull cash out of your house to pay off the credit cards only if you're not going to simply run up more credit card debt.

"Using home equity to do a debt consolidation really depends on whether the root cause of the debt has been addressed," says Greg McBride, Bankrate's chief financial analyst. "A pattern of overspending could lead to running the credit card debt back up all over again, plus now carrying home equity debt as well."

In other words, use home equity as a lifeline only if your finances are on stable footing and your spending is under control.

"Having a solid repayment plan is essential," says Linda Bell, Bankrate senior writer, Home Lending. "Think of it as a roadmap for your finances. Without a clear path to follow, you risk falling deeper into debt."

Yellow light: Possible uses for home equity

Paying tuition or other education expenses. This one is a bit of a gray area. If you owe student loans from private lenders, it can make sense to pay those down by tapping home equity. The cost of home equity financing is quite competitive with private student loans, whose APRs currently can be as high as 16 or 18%.

On the other hand, if you have federal student loans, you need not rush to pay them down, McBride says. Their reasonable interest rates and income-based repayment plans make them a less-crippling form of debt, and generally less expensive than home equity loans.

Investing. Millennials are more likely than other generations to approve of using home equity to invest. While 30% of that age group said they liked that idea, just 13% of Gen X and 8% of baby boomers signed off on the notion of redirecting home equity to another investment.

As with using home equity to pay down debt, the calculus around investing is nuanced. If you want to tap home-based funds to fatten your financial or retirement accounts, many financial pros give their blessing. There's a solid case to be made for putting cheap mortgage money to work for you, helping to create a well-diversified portfolio.

On the other hand, if you aim to tap equity to day-trade stocks or dabble in cryptocurrencies, the smart advice is to think again. Such a gambit might pay off, or you might lose big. "Stock prices can go up, but more importantly, they can go down," says Bell. "Borrowing against your home equity to invest in stocks is dangerous because if the market drops, you might end up with a lot of debt and put your home at risk."

Red light: Not-great uses of home equity

Day-to-day expenses/keeping up with household bills. Millennial homeowners are more likely than other generations to approve of tapping home equity just to pay the bills. Fully 23% of that cohort say pulling cash out for that purpose is a good reason to access equity, compared to just 13% of Gen X and 12% of baby boomers.

Yes, the economic reality is harsh for many millennials: Home price appreciation has far outpaced wage gains over the past decade. And many young adults are saddled with hefty student loans. That can make it tempting to turn the homeownership stake into ready money.

However, this is another area where financial planners' advice aligns with the wisdom of older generations. Borrowing for 15 years (the typical term for a home equity loan) to pay this month's child care, groceries and car repairs isn't a sustainable lifestyle. If that's your situation, look for ways to boost your income or to tighten your budget.

Taking a vacation or buying big-ticket items. Here's an area where financial experts lean towards those prudent elders of the baby boom and Gen X. They're against it.

Think of it this way: Your home equity loan's term is 15 years because real estate is a long-lived asset that will give you years of use and almost certainly gain value. A Caribbean cruise or a gaming console, on the other hand, will be long forgotten even if you're paying it off for a decade-plus. If a home equity loan is your only option for paying for a holiday or another big-ticket item or event, better to put the purchase on hold.

Otherwise, "you're trading your home's worth for things that depreciate quickly," says Bell. "If you can't repay the loan, you might end up with debt and no lasting benefit from those purchases."

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