Millennials More Likely to Use HELOCs in Less Traditional Ways

Younger homeowners are more likely to borrow for business ventures, vacations
A young couple at their computer

It’s not unusual to take out a home equity line of credit (HELOC) to finance home improvements or pay off high-interest debt. But there are less traditional—and not always so wise—ways that some people use a HELOC. And according to a new survey, many of those people are millennials.

As the name implies, a HELOC is a line of credit that uses the equity in your home as collateral. You can draw funds from it as needed, just as you would borrow from a credit card. You only pay interest on the amount you borrow, and though interest rates are typically variable (meaning they may fluctuate over time), they are often lower than those of credit cards.

Citizens Bank conducted a YouGov survey of homeowners who either currently have a HELOC or are planning to apply for one in the next 12 to 18 months. They found that the most common use for HELOCs, by far, is for home improvements, with 70% of HELOCs being used for that purpose.

However, a larger proportion of millennials had other things in mind for the money.

  • 45% of millennials said they would use HELOCs to provide capital for a new business venture, compared to just 19% of HELOC borrowers over 40
  • 44% of millennials would use HELOCs to buy big-ticket items, compared to 35% of those over 40
  • 44% of millennials said they would use HELOCs to take time off of work “to support or care for family,” compared to 24% of those over 40
  • 36% of millennials would use HELOCs to take a vacation, compared to 17% of over-40 borrowers

Overall, 87% of homeowners who have access to a HELOC said they were optimistic about the value of their property. The biggest reason for the optimism: The majority of those who were optimistic—65%—reported seeing the value of their home increase in recent years.

“Property values are at record highs across most of the U.S., driving increases in consumer optimism,” says Brendan Coughlin, president of Consumer Deposits and Lending at Citizens Bank.

However, optimism aside, you should always be cautious before taking money from a HELOC for a number of reasons:

  • HELOCs typically have variable interest rates, meaning the rates can potential rise over time (though they can also fall).
  • Some HELOCs require you to make a large balloon payment when the loan period ends. If you don’t have that money or can’t refinance, you could default on the loan.
  • When you borrow from a HELOC, your house is the collateral. That means if you are unable to pay back the loan, you could lose your house. Likewise, you may need to pay off the HELOC if you decide to sell your property.
  • If the value of your home decreases, you could end up underwater on the loan — and in some cases, HELOCs can be suspended, with no further draws allowed on the credit line.

Sometimes it’s worth taking on a HELOC, especially if it can allow you to replace other debt with higher interest rates. But when it comes to less traditional purposes, consider whether it might make more sense to save the money you want rather than borrow it.

For example, if you use your HELOC to pay for a vacation, not only will you be spending more for the vacation in the long run because of the interest you’ll owe, but you may also be paying for that vacation for years after the experience.

Tamara E. Holmes

Tamara E. Holmes is a Washington, DC-based writer who covers personal finance, entrepreneurship and careers.

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