A reader who works with RE, Whittier Homes, says:
I’m in the camp that you don’t leave too much equity tied up in the walls of a house. That being said there is a risk factor or a comfort zone that every investor has to know. The bottom line is you don’t want to get over leverage and get caught on the short end of a declining market.
Home equity is simply what your home is valued at (today) less what you still owe on it (today).
This leads me to think that I’ve never said … and, nobody’s ever asked: How much equity should I have in my own home?
Well, there’s a reason:
I have NOTHING to say about how much equity – as a % of your house value – and, EVERYTHING to say about how much equity – as a % of your Net Worth – you should have tied up in your own home.
In other words, your equity is a function of:
– How much your house costs to buy
– How much it increases in value over time
– How much deposit you have available now
– How much you choose to put in / take out of the value of your house over time
I have no advice as to how much you should spend on your house in the first place, that’s your business not mine 🙂
But, I do have some guidelines that pretty much help to answer the “how much home should I buy?” question (other than for your first home), albeit obliquely:
1. The 20% Rule ensures that you are always investing at least 75% of your entire Net Worth (after allowing for another 5% to be spent on ‘stuff’),
2. The 25% Income Rule ensures that if you do decide to borrow money to buy a home, that you do not overcommit your cashflow,
3. The Cash Cascade makes sure that if you do have a mortgage, that you don’t pay it off too quickly if better investing opportunities abound.
Put these ‘rules’ into practice and you won’t go too far wrong, when it comes to your own home …
Does it really have to be that complicated? Lets say you’re like me and haven’t got a lot of extra cash. In that case you want to keep cash available, and the amount tied up in the house as small as possible, i.e. longest possible mortgage and cheapest house that still suits. If you’ve got some extra cash and aren’t sure whether to put into ‘home equity’ or wherever, isn’t it simply a matter of return %? IF you take all that home equity and invest it somewhere else, will you make more money? {RE appreciation – max possible mortgage costs} greater than {other investment}? If yes then minimize mortgage, if no then maximize mortgage.
@ ill liquidity – Possibly …. assuming that you CAN’T find a better LONG-TERM investment.
But, if you want to make a Large Number / Soon Date or Get Rich(er) Quick(er) or Make $7 Million In 7 Years (all of which is where this blog is aimed), then you had better go out and find one!
BTW: once you’re IN the house, it will appreciate just as fast with/without a mortgage 😉
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