Millennials have been slower to enter the real estate market than previous generations, due to higher student loan and credit card debt, stagnated wages, and a host of other reasons. But, this group of 20-30 somethings is starting to catch up.
According to a recent report from Zillow, millennials are shaping the current real estate landscape—with half of all homebuyers falling under the age of thirty-six.
As noted in our previous article, home prices have been recovering in the past few years and homeowners are gaining increased equity in their homes. Historically, this type of environment has caused a home equity lending boom—with homeowners borrowing to buy cars, pay off student loans and credit card debt, or to add on a garage.
Although millennials are embracing traditional home equity loans, an emerging trend among this age group is their use of down payment assistance firms—also known as “co-buyers” and home equity investors—showcasing a growing millennial demand for convenient, modern lending alternatives.
A home equity line of credit (HELOC) is a secondary mortgage on top of your primary loan. Unlike a refinance, these secondary loans don’t affect the interest rate of your first mortgage.
The Federal Reserve has raised rates seven times since the Great Recession, twice this year, and hinted at two more possible rate increases, so it’s understandable that owners who have locked in a fixed rate are weary about refinancing.
Although there are still many benefits to a cash-out refinance, millennials are tapping into their home equity with HELOCs. According to a 2017 survey by TD Bank, millennials were using HELOCs more than Gen-Xers or baby boomers. In 2018, HELOC originations were up 18% in Q1 over the previous quarter and up 14% from a year ago. And this trend is anticipated to continue, with the number of American consumers expected to take out a HELOC projected to double to 10 million over the next five years.
But, traditional home equity loans, HELOCs, and refinances all follow the classic loan structure of anywhere from 5-30 years of required monthly repayment and the possibility of variable interest rates—meaning your payment could fluctuate up and down over the life of the loan. In recent years, co-buyers and residential equity investors have emerged as an alternative solution to help borrowers tap into their home equity without the commitment of a conventional loan.
Unison and Point both allow borrowers to sell a small fraction of the equity in their home to investors in exchange for a lump sum of cash. These services eliminate the need for monthly payments and closing costs, in exchange for a fractional ownership in your property.
Similarly, as home prices rise, so do down payments, and borrowers are increasingly seeking out co-buyers to help fund their home purchases.
The median home value in the United States is $215,600. This is an 8.7% increase over 2017 and prices are expected to rise a further 6.5% within the next year.
Unison will contribute up to half of your down payment in exchange for an equity stake in your home. In some cases, this program can give the homebuyer a 20% down payment—providing a smaller mortgage, lower monthly rates, and eliminating the need for private mortgage insurance (PMI).
Co-buyers (including parents, other non-spouse parties, and firms like Unison) accounted for 17.4% of all Q1 2018 home sales. With one-third of millennials homeowners choosing to buy in urban centers (Seattle, The Bay Area) where home prices continue to rise, the need for down payment support firms and home equity investors will most likely proceed in the near future.
This willingness for millennials to give up a partial stake in their home to forgo a monthly payment suggests a new relationship with the idea of owning property—a generational shift that prioritizes ease, convenience, and technology over complete ownership.
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