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:
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 …