Also, I think that the % equity question is more for people who are looking to buy into a home, and not as much for someone like you who already has one since changing your house is a major expense and not just a matter of “re-balancing” like stocks for example.

It sounds like you have a large portion of liquid funds to pay off the HELOC if rates does jump, so if the refi and HELOC setup etc aren’t too expensive to do, I’d totally do it and would pay down the HELOC as soon as rates jump. In the mean time, you can pocket the difference of lower rates. I’d also try to see if there’s a way to get rid of the private mortgage insurance since you are probably paying for it when you don’t need to with the liquid assets that you have.

Going back to your fundamental question though, there’s really no right answer as there’s no magic number to shoot for but let me share with you an observation that may help. Chinese people (I think it’s actually all Asians but I may be wrong) as a culture is much more conservative in terms of investments like these. In America, 30% equity is considered very high but many Chinese would be doing everything they can to pay down that mortgage “debt” even if they own 90% of the house. That’s why there are many Asians who will pay cash for a house because many Americans with that type of purchasing power would be using just as much cash as 20% equity and buying a house that’s 5x as expensive.

Of course, there’s no right or wrong way as it’s all just a personal choice. Using the cash to invest definitely makes sense mathematically, but no one ever gets poor being debt free. Remember that our end goal is to be satisfied and happy with our life, and not gaining every last cent possible. When you take more risk, there is a higher level of extreme success but also a higher degree of failure.

For instance, I have a 6% jumbo loan on a house I have 30% equity in it. I’m considering doing a conforming loan + HELOC combo to take advantage of the low rates, but the variable rate of the HELOC is unsettling in that I have a strong suspicion that inflation will really kick off in the next few years to help erase all that public debt. Assuming that occurs, that will leave me in a worse situation, unless I flood the HELOC with cash to close it out – effectively puting me in for another 30% additional equity. Take in the inflation, I could quickly find myself with 75% ownership, which will drastically weight my house high on my investment diversification. Hence my question.

- JP

Thanks for pointing out the cost of houses there – truthfully, it is mind boggling…. No one here makes that kind of money to start with, and luckily the houses do not cost that much either – as long as you don’t buy oceanviews… which is rather spendy, (well over a million for a windy sandy salt encrusted damp mess) even here. I passed up a 4 bedroom 2 bath, carport on 2 acres last summer for $150,000 because my house wasn’t finished then to sell and/or trade. But right now there’s a 3 bedroom, 2 bath, 2 car garage on 1/2 acre for $130,000…. or I could just add a garage on to this place and call it good There’s a nice fixer-upper 2 bedroom for $60,000 in town…. any takers?

You have to remember that most people aren’t like you in being responsible with their money. When they pay down 10%, that’s pretty much all they have saved up. With no savings and just an income with a mortgage payment, what happens if that person loses his/her job? Since most people’s income are based mainly on their salary, the income to debt ratio when you are trying to leverage 10x your down payment is VERY risky.

Let’s take an example. Let’s say someone makes $150,000 a year and he is debt free. That means he has $45,000 a year (with a 30% debt to income) for his mortgage and insurance. Let’s just take $43,800 and leave the rest for other house related expense. With that kind of purchasing power (according to income to debt ratios), he can pay $3,650 per month mortgage, he can get a $720,000 mortgage at roughly 4.5%. Then with a $80,000 down payment, he can buy a $800,000 or so house. (you may think the numbers are big but here in California, there are tons of cases which are much worst)

This scenario might be fine for some people, but what happens in our current situation? Housing went down at least 20%, so refinancing or home equity loans aren’t possible (this is where the down payment becomes useful). If the person above loses his/her job, the $3,650 every month + expenses, which for someone like him might be $7,000 or even $8,000 (most of the time, even more) a month doesn’t go away. At that burn rate, that person better find a good paying job fast, because he is going to use up his savings/investments VERY quickly.

The likely scenario is that the person would take 6-8 months trying to find a job, and instead of getting $150,000, his salary becomes $120,000 if he’s lucky. For this example, the mortgage all of a sudden is 36.5% of his salary. If he has at least $64,000 in savings, then this person would be fine. If he doesn’t (which most people who bought a house don’t), then the foreclosure process start.

While responsible people can take advantage with a smaller down payment, it doesn’t make sense for the banks or mortgage companies to offer it because:

- Even responsible people will have problems when the total mortgage amount is high (see example)
- Banks will never be able to tell how responsible or irresponsible you are. They can only tell how much you make currently and how much you have in your bank account.
- With relaxed rules, most people will abuse it. For example, if I have $60,000 and want to buy a house, most people will try to buy a $600,000 house when the rules are 10% down because those look nicer even if the responsible thing might be to get $300,000 house and pay $30,000 with some savings left just in case.

I once put down only $2000 cash on a $275,000 farm. It was the right deal at the right time, and the farm was paid off in 14 years. I think people who are careful with their money can do these things, but it’s not for the average person who does not have savings and investments to back up their purchase should something go wrong. (No, it was NOT thru a bank – it was an owner contract)

Personally, I have never put down more than 10% on any house or property because for me, it would be a financial error on my part to do so (in most cases). One exception would be a home that will not finance (like the one I just bought for the price of the lot only) and so I paid cash for it. When my money was in the bank earning 10-12%, and a home mortgage interest rate was 6-7%, it did not make financial sense to withdraw my high interest earning money on a lower interest loan. If I let my money sit in the bank, the interest earned alone would make my house payment.

One of my first rules of buying property was to not use my own money – ie, use the bank’s money, or a private contract, and let my money sit there and grow bigger. As long as the investment was bringing in a higher interest percentage than the mortgage interest percentage being paid out, it was more financially sound to leave my money sit and put as little down as possible. Just my opinion – but it has worked for over 30 years for me.

But…WHERE were the banking and lending regulators? What went wrong that unscrupulous lenders were allowed to lead the dumb and the feckless down this particular garden path? We got idiocy, all right. But just as we don’t got milk in our glass without some help from the cow, we don’t got stupid without some help from various enablers, either.

Allowing everyone to buy with a small down payment is totally not the right incentive model for a more responsible society.