Perhaps the Millennial generation is more interested in having a good time than their baby boomer parents and Generation X siblings. Perhaps this cohort’s financial tastes have been shaped by historically low mortgage rates and rising home prices.

Whatever the reason, Americans between the ages of 25 and 40 have significantly different attitudes towards the use of their home equity than older homeowners.

According to a recent Bankrate poll, 14 percent of millennial mortgage holders say they would use home equity to finance a vacation, compared with just 4 percent of Generation X (ages 41 to 56) and 3 percent of baby boomers (57 to 56 years). 75).

And 10 percent of millennials say they would get cash out of their home for non-essential purchases like electronics or a boat. Only 3 percent of Generation Xers and Boomers say that sounds like a good idea.

On the flip side, only 49 percent of millennials say they use equity for home improvement, compared with 64 percent of Generation X and 66 percent of boomers.

Michael Golden, co-founder and co-CEO of @properties, a real estate agency with 4,000 agents in Chicago, says the attitudes are no surprise. Millennials have long been told that they value work-life balance more than their parents and older siblings.

“You’re a little more balanced,” says Golden. “Life experiences are a little more important to them. They are willing to spend money in other ways and they are ready to use equity in their home in other ways. “

Traditionalists urge caution when it comes to tapping home equity. Melinda Opperman, president of Credit.org, recalls that many homeowners regretted pulling cash out of their homes during the pre-Great Recession boom.

“Building wealth in a house is a long, deliberate process, and that wealth accumulation increases the longer you stay in a house,” says Opperman. “In general, we wouldn’t advise anyone to withdraw this equity unless they use it to improve the property, which increases the value of the home and builds the equity back up faster.”

A completely different price picture

Part of the generation gap is simple: Millennials have stepped into their home buying years with mortgage rates at microscopic levels.

In contrast, the baby boomers lived on 30-year mortgage rates of over 18 percent in the early 1980s. In the 1990s, Generation X rates were 9 percent. Millennials hardly remember 5 percent interest rates – from January 1, 2010 to January 1, 2020, the average interest rate on a 30-year loan was just over 4 percent.

Then came the COVID-19 pandemic and 30-year mortgage rates fell below 3 percent, the lowest ever. With credit this cheap, old debt avoidance rules may seem less relevant to some.

“Now borrow in the 2s or the low 3s,” says Golden. “When interest rates are this low, the psychology of debt is very different. It makes sense to have debts. “

Another reality: Americans between the ages of 25 and 40 are focused on living their lives rather than saving for the distant future.

“Millennials have a longer runway,” says Golden. “You don’t think about retirement; they are now in construction mode. “

Home values ​​are skyrocketing

Another factor plays a huge role in millennial homeowners’ attitudes toward home equity: They have been fortunate enough to buy during the hottest real estate market in US history. At the national level, property values ​​rose a record 19.7 percent from July 2020 to July 2021, according to the latest S&P CoreLogic Case-Shiller house price index.

Home equity tapping is only possible when you have equity, and homeowners have it at unprecedented levels. Americans had more than $ 9.1 trillion in “vulnerable” home equity by mid-2021, according to mortgage data company Black Knight.

“Some attitudes toward home equity could be influenced by the recent rise in home prices,” said Greg McBride, Bankrate’s chief financial analyst. “Those who remember the real estate crisis and the pressure on debt homeowners are likely to be reluctant to tap equity unless absolutely necessary.”

Why you should tap into equity – and why not

Here’s a breakdown of the reasons for pulling cash out of your home, along with a guide on whether that reason makes financial sense:

Do-it-yourself and repair work: green light.

Boomers and Generation Xers are giving their thumbs up for this reason to tap into equity. Not much argument from financial experts. Home improvements are likely to take years, a timeframe that matches the mortgage debt horizon. Kitchen renovations and bathroom updates are a matter of course.

But projects that are not absolutely necessary, such as a swimming pool or a playroom, do not necessarily reward you with a corresponding increase in the value of the property. However, if you need new air conditioning or an updated electrical system, a mortgage is the cheapest money you can find.

Debt Consolidation: Yellow Light.

If you’re in credit card debt and paying double-digit interest rates, it can make sense to swap expensive revolving debt for historically cheap mortgage debt. However, this strategy has one major caveat: pulling cash out of your house to pay off the credit cards only if you don’t simply build up more credit card debt.

“Using home equity for a debt consolidation really depends on addressing the root cause of the debt,” says McBride. “A pattern of overspending could result in credit card debt coming back all the way up and now home debt being borne as well.”

Opperman says homeowners who use home equity as a lifeline can dig a deeper hole for themselves in the long run. “You can only have this equity paid out once, then it’s spent,” she says. If you follow up your cash-out refi with additional expenses, you will face a “second settlement” – but this time with less home equity to cushion the decline.

Investing: yellow light.

Millennials are more likely than other generations to use home equity to invest. While 26 percent of that age group said they liked the idea, only 17 percent of Gen X and 10 percent of baby boomers agreed with the idea of ​​diverting home equity into another investment.

As with using home equity to pay off debt, the calculation of investing is nuanced. If you want to tap into cheap mortgage money to top up your retirement savings and invest that income in a well-diversified portfolio, finance professionals are giving their blessings. There are good arguments in favor of using cheap mortgage money to prop up your retirement account.

On the flip side, if your aim is to use equity on day trade stocks or gamble on the cryptocurrency boom, the wise advice is to reconsider. Such a move could pay off or you could lose a lot.

Student loan repayment: yellow light.

This is a bit of a gray area. If you owe student loans from private lenders, it may make sense to pay them off by tapping home equity. Unlike federal loans, private student loans have higher interest rates and less flexibility.

On the other hand, if you have federal loans, you don’t have to rush them, says McBride. Their reasonable interest rates and earnings-based repayment plans mean federal student loans may not be a crippling form of debt.

Going on vacation or buying electronics: red light.

This is where financial experts agree with the prudent elders of the baby boom and Generation X.

Think of it this way: the life of your home loan is 15 or 30 years because real estate is a long-lived asset that you will use for years and will almost certainly increase in value. A Caribbean cruise or a game console, on the other hand, will long be forgotten even if you have paid off for decades. If a cash-out refi is your only option to pay for a vacation or other important item, better put the purchase on hold.

Keeping up with household bills: red light.

Millennials are more likely than other generations to tap into home equity just to pay the bills. 28 percent of 25 to 40 year olds say they would withdraw money for it, compared to just 17 percent of Generation X and 14 percent of baby boomers.

Yes, the economic reality is tough for many millennials: the rise in home prices has far outpaced wage increases over the past decade. And many young adults are saturated with high student loans.

However, this is another area where the advice of financial planners aligns with the wisdom of older generations. Taking out 30 years of credit to pay for childcare, shopping, and car repairs this month is not a sustainable lifestyle. If so, look for ways to increase your income or tighten your budget.

methodology

Bankrate.com hired YouGov Plc to conduct the survey. The total sample was 3,657 adults, 1,041 of whom had a mortgage. The fieldwork was carried out from July 26-29, 2021. The survey was conducted online and meets strict quality standards. A non-likelihood-based sample was used, using both quotas upfront during the survey and a back-end weighting scheme designed to provide nationally representative results.