Home ownership is often viewed as part of the American dream. Despite indications that millennials are shunning conventions, the house with the white picket fence continues to be a goal for many people. A 2016 survey by the Pew Research Center found 72 percent of renters would like to buy a house in the future.
"In America, the mindset is you almost feel ashamed if you tell someone you rent," says Kyle Winkfield, managing partner at finance firm O'Dell, Winkfield, Roseman and Shipp in the District of Columbia.
Financial planners say one appeal of home ownership is the opportunity to build equity – or value – in a property. "People need a place to stay," says Ash Exantus, director of financial education at BankMobile. Rather than pay rent for 30 years and have nothing to show for it, mortgage payments can end with a person owning something of value. "That money isn't being flushed down the toilet," Exantus says of how people view mortgage payments compared to rent payments.
However, having equity in a house, even a paid-off house, isn't the same as having cash in the bank. Before rushing to pay off your mortgage, Winkfield suggests considering whether it would be better to put extra money elsewhere instead of toward a mortgage balance. "I like having options," he says, and home equity limits options for the following five reasons.
1. Equity in a house isn't liquid. On paper, having $100,000 in home equity contributes to a person's net worth the same as having $100,000 in a bank account. However, in reality, there is a significant difference between the two. "Cash buys milk, eggs and health care," Winkfield says. "Equity doesn't."
Equity isn't liquid. In other words, it can't be easily converted to cash. Equity can only be accessed if someone takes out a loan against the value of their house or sells the property. "That's the major downfall as opposed to having money in a bank account," Exantus says.
The process of tapping into equity can take time, something you might not have in the event of an emergency. While you can set up home equity lines of credit in advance, those typically aren't guaranteed and can be revoked if the market takes a turn for the worse.
2. You need to ask permission to use equity. Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan, says it can be time-consuming to access equity, and it's also not a sure thing. "Let's say you have $200,000 of equity in your home," he says. "You have to go to the bank and ask for permission to get your own money back." Financial institutions are under no obligation to extend loans based on a property's equity, and they may require applicants to meet a list of requirements.
"If I need my money out of [a house], I need to be duly employed," Winkfield says. That could mean someone in need of cash because of unemployment or an extended illness won't be able to access their equity.
3. You pay interest on the money. Once a homeowner is approved for a home equity loan, interest will need to be paid. "You have to pay someone else an interest rate for your own asset," Foguth says. He uses the example of a $100,000 loan taken out at 4 percent interest. "Every year, it costs you $4,000 to have your own money."
Winkfield argues it's not even really your money if you have to pay to get it. "Interest is for the privilege of using someone else's money," he says.
4. Money in the market could earn more. Paying off a mortgage has long been a goal for many people, but there's no need to hurry in today's low-interest climate. "When your parents had a mortgage, their interest was double digits," Foguth says.
However, average mortgage rates have been below 5 percent since 2010. Meanwhile, the S&P 500 index on the stock market has averaged a 9.8 percent annualized return over the past 90 years. That means many people may come out ahead if they invest money rather than make extra mortgage payments.
"From an interest rate standpoint, the math doesn't make sense," Fogurth says about paying down a mortgage more quickly as opposed to investing money.
5. Housing prices can decline. Property has long been seen as a safe investment, and some people feel more comfortable having their money tied up in a house as opposed to in the stock market. Yet, as the 2008 recession demonstrates, property values don't always go up. "Putting your financial security in one sort of vehicle is a mistake," Exantus says.
Winkfield recommends that you focus on building wealth in bank and investment accounts. Ideally, you will accumulate enough to provide the peace of mind that comes from knowing you can pay off the house with cash at any time. It's not always wise to write a big check to pay off the mortgage. Instead, continue to make regular payments while allowing investments to grow. Eventually, "You'll have it paid off and have equity, but you'll also have money in the bank," Winkfield says.
Financial planners say they know why people want to pay off their mortgage. There is a sense of security that comes from living under a roof that doesn't have a loan attached. Still, there are property taxes to pay and natural disasters can always occur. Savings and investments don't come with those same costs or risks, which means that, in the end, equity might never be as good as cash in the bank.
A new generation of homebuyers
As the millennial generation, also known as Generation Y, takes a greater role in the housing market, young people’s preferences are starting to shape the way real estate business is done. The real estate portal Zillow predicts that millennials will overtake baby boomers as the generation purchasing the largest number of homes this year, making their preferences even more important. Here's a look at 10 ways millennials are changing the homebuying process.
Don’t call us, and we won’t call you.
For decades, the telephone has been the real estate agent’s tool of the trade. But younger homebuyers don’t want to talk. They want texts – and some prefer email. Dealing with these tech-savvy buyers has posed a challenge for the nation’s real estate agents, who are considerably older than the homebuying population they serve. A National Association of Realtors survey of its members in 2012 found that only 3 percent of agents were under 30 and 81 percent were older than 45, with 25 percent over 65.
We've done our homework.
More than 50 percent of millennials search for homes on their phones and, among those, 26 percent end up buying a home they found that way, according to the NAR. “With millennials, we do not control information,” says Player Murray, managing broker at Berkshire Hathaway HomeServices York Simpson Underwood Realty in Raleigh, North Carolina. “What they need is for us to interpret the information.”
We don't like surprises.
Younger buyers want to know what to expect and when. “I see them wanting to understand what’s going on at any time in the process more than any other generation,” says Paul Reid, a Redfin agent in Southern California’s Inland Empire region.
They also like timelines, checklists and charts. “If they don’t know what’s coming around the corner, it could cause paralysis when they get there,” says Murray, who's also a member of Berkshire Hathaway HomeServices’ REthink Council, a group of 15 young agents nationwide formed to help the company meet the needs of younger customers and recruit young agents.
We want customer service, and we want it now.
Millennials expect to be partners in the home search, and they want quick answers to questions. “They want information, and they want valid information, and they want it right now,” Reid says. “They’re the generation of Google at your fingertips.”
Is there an app for that?
Younger buyers live on their smartphones and use them as a key tool in their home searches. Apps are often their preferred method to check listings and collect other information. Redfin is an example of a company that's incorporating apps and other tech tools into its services. Customers can ask for home tours online or via the company’s app, as well as sign up for alerts about new listings and use their phones to search for open houses. The Redfin Deal Room lets customers keep tabs on the process of their transactions 24/7.
What did your other clients think?
Many millennial homebuyers get recommendations on agents from their parents, but they also do some research online before they ever call an agent. They want to see testimonials on an agent’s website, as well as read online reviews.
You call that social media?
As far as millennials are concerned, a Facebook page with listings is something their grandmother would do. They expect agents to engage them on social media. “They need to feel like they’re a part of your business,” Murray says. “Just reposting an article that’s been posted 1,000 times across the country isn’t enough.”
Tell us what data you want, and we’ll text it right over.
Unlike older buyers, young people are not bothered by being asked for bank statements, employment verifications or other personal data required for mortgage approvals. “The younger people are used to having to supply everything about who they are,” says Don Frommeyer, chief executive officer of the National Association of Mortgage Professionals and a mortgage broker in Indianapolis. “They’ll give you everything.”
No stainless steel appliances? Reject.
Younger buyers sometimes have trouble seeing the bones of a home and often don’t know which features can be changed easily at a minimal cost. That’s an area where they value guidance from agents. If they’re buying a home that needs work, they also value referrals to contractors and vendors. “You’ve got to be able to provide resources to them,” Murray says.
Yes, we can afford that.
Finding a home they can afford in the location they want is a challenge for many younger buyers, especially in cities, says Nela Richardson, chief economist for Redfin. Some are embracing the sharing culture by seeking homes with rental units or rooms that can be rented out on Airbnb or other services. “I think we’re going to see millennials solve that problem in a different way,” Richardson says.
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With more than a decade of reporting experience, Ms. LaPonsie’s work has been featured on MSN, CBS MoneyWatch, Yahoo Finance, NerdWallet and numerous other sites on the web. She has been a guest of Consumer Talk with Michael Finney and The Steve Pomeranz Show.
A native of Michigan, Ms. LaPonsie received her bachelor’s degree from Western Michigan University. You can follow her on Twitter or connect with her on LinkedIn.