While many homeowners choose to tap their home equity to pay for renovation projects, younger borrowers are more likely to use home equity lines of credit for purposes other than home improvement, according to a survey released today by Providence, Rhode Island-based Citizens Bank.
Citizens’ research revealed there are significant differences in how HELOCs are used across generations. The survey found that Millennials preferred other financing options to HELOCs for their home improvement projects compared with older homeowners by 60% versus 47%.
While traditionally the majority of HELOCS are used for home improvement projects (70%), Millennials are significantly more likely than homeowners over 40 to use a HELOC for non-traditional uses, including financing a new business venture, 45% versus 19%; big-ticket purchases, 44% versus 35%; taking time off work to support or care for family, 44% versus 24%; and taking a vacation, 36% versus 17%.
American homeowners with mortgages, which account for roughly 63% of all properties, have seen their equity increase by 8.1% year over year, according to data analytics provider CoreLogic. The average homeowner gained $9,700 in home equity between the fourth quarter of 2017 and the fourth quarter of 2018. While home equity grew in almost every state, Western states experienced the most significant annual increases.
According to Citizens’ survey, those with a HELOC report that the top drivers for optimism are seeing the value of homes increasing in recent years, 65%; affordability, 50%; a strong economy, 43%; and the current national housing market, 31%.
Brendan Coughlin, president of consumer deposits and lending at Citizens Bank, outlined the borrowing differences between the two generational cohorts.
“Baby boomers are almost exclusively using a home equity line of credit for very fiscally responsible purposes,” Coughlin says, noting that older borrowers are less likely to use their HELOC as an ATM.
The most common needs might include using a HELOC for funding home improvements that add value to a home, consolidating high-interest credit card debt, paying for a child’s education and as a general purpose emergency fund.
“The Baby Boomer generation is a little split down the middle on using a HELOC for a child’s education, says Coughlin. “Some are happy to do that because they don’t want to see their children be burdened with student loans. Others would prefer to see their kids have some skin in the game. They would rather structure their payment for school in a different way other than using their home equity.”
Millennials tend to be first-time buyers, so some typical HELOC borrowing needs might not be relevant.
“They are not quite at the point where they are using their equity to pay for their kids’ education because they are not at that age,” said Coughlin. “They may have just bought their home, so they are not starting home improvement at the same level. When they do use home equity, they have tended to use it for financing a new business venture or a big-ticket purchase like a car, or taking time off, whether it’s a vacation or to support their family.”
He added that Millennials who are carrying the weight of student loan debt might want to consider rolling their student loans into a HELOC to reduce their interest rate.
“One of the biggest benefits of a HELOC is once you have it set up for 10 to 15 years, depending on the bank, that product is going to be a safety net for you to give you flexibility to manage your home equity in any way you want,” says Coughlin. “You can draw it down, you can pay it back, you can never tap into it at all. But in the case that life throws you a curveball, you have that safety net in a pinch where you can use it, whether it’s to repair your roof or a family emergency situation or whatever else.”
