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What percentage of your assets are in home equity?

October 2, 2017

For the past few years, we have been balancing mortgage pre-payments with investing for retirement. As a reminder, our goal with the mortgage pre-payments are to reduce payment risk and to eventually have our house paid off. I don’t include our home in our investible assets, nor do I include our mortgage payment when figuring out “our number” to achieve a 4% SWR. (We don’t have a plan for early retirement, but we of course would like to be financially independent.)

As we make these choices, one metric that might be useful for us to track is our home equity as percentage of net worth. I don’t think this can ever be too low, but having too much of my net worth in a single asset is problematic.  There are no prescribed rules-of-thumb for this, but I did find some perspectives out on the internet.

Philosophically, I agree with RetireBy40 and 1% would be a fine number.  Practically, that just doesn’t work for the life we have chosen. We live in a high cost area and chose to purchase a home rather than rent.  We’d have to have an extremely high net worth or limited equity in our house to maintain a very low percentage.  However, I don’t want to tie too much up into our home. I’d probably stop prepayments in favor of investing more at about 33-35%.  If it dropped to 10-15%, I’d evaluate the option of investing less in favor of prepayments, assuming I was still saving at least 20% for retirement. I still might not do it – it would depend on how much mortgage is left, what our payment is, and how our jobs are looking.

Having equity in our primary residence is unavoidable for the lifestyle we have chosen, but I do want to limit this from being too large. To keep an eye on this metric, I have a new graph in my finance spreadsheet!  Ta da!

Untitled

Honestly, the chart turned out to be less exciting than I expected and would be really boring if plotted on a 0% to 100% scale!  As in many areas of life, boring is a good thing, and the range I’m in is comfortable.  Right now, we are at 28%.  If stocks take a huge hit and real estate doesn’t, it could jump to 33%.  If I hit my prepayment and retirement savings goals for 2018 and stocks stay flat, we’ll be around 29%.  They are skewed a bit low since I’m using only the tax assessed value (purchase price + prop 13 limited value), but this seems fine since we only have to pay for the purchase price. Growth is kind of irrelevant unless we choose to move.  At any rate, these are all fine numbers for me. I do expect this to drop over the very long term, but I’m comfortable increasing it slightly in the near term.

How about you?  How much of your wealth is in your home? Does it seem like an acceptable number for your lifestyle? Do you have a number you’d be less comfortable with?

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12 Comments leave one →
  1. October 2, 2017 8:34 am

    Your ratio looks pretty comfortable 🙂 Right now we are sitting about 33% if you count current condo value and our combined net worth. Just at my portion though? It’s finally under 50% with some of my husband’s buy-in, which it hasn’t been in a long time. That became a bit too much which is probably one of the many reasons I stopped pre-paying the mortgage. I’m comfortable with the 33% figure and expect it to settle in about 25% assuming we don’t move.

    • October 2, 2017 12:32 pm

      Yeah, it is fine, but somehow less informative than I had hoped, haha. There is a large range for comfort.

      Mine actually jumps quite a bit if I use the Zillow/Redfin value (which are ~100k apart!) – but I don’t have any idea how close these are and really it has only been 3 years!

  2. October 2, 2017 8:36 am

    I am in a HCOL area and my home equity is about half my net worth. I’d rather it be closer to a third or a quarter, but it was important to me to get a foothold into the local market before we were priced out (even if it meant dumping all my liquid assets into the house at the time).

    • October 2, 2017 12:20 pm

      Yeah, I intentionally did not title this how much “should” be in your house, because I don’t think there is a right answer.

      When deciding if you are ready to buy, this isn’t an important metric (compared to other can-you-afford-it metrics) and there are a lot of factors. If you are younger and have lots of time to save for retirement, having more in your house shouldn’t be a big deal. Even if you aren’t, if it takes more to get into a property and getting into a property make sense, then you do it.

      It is a somewhat useful metric when deciding whether to focus on prepayments or investing, but it is mostly informational rather than prescriptive.

  3. Ms. Steward permalink
    October 2, 2017 2:35 pm

    We have about 10-15% of our net worth in our home. Possibly a little more if you count what they say our home is worth with equity versus we actually paid. I am comfortable with paying until the PMI is gone, which may have us inch upward, particularly since after that, investments will come hot and heavy for us and lower it again.

    Honestly how the market is doing will make some impact, too. I know timing the market is tricky, but if it stays high, that makes me want to put more in the house.

    • October 4, 2017 11:49 am

      Yes, I’m with you – it is hard to increase our investments when the market seems so high. We won’t STOP investing, but I’m happy to not increase it.

  4. October 3, 2017 9:39 am

    I’m not sure because I don’t know what our net worth is… It’s less than 30%. In terms of equity, I’m not really sure how to think of things… for example, for someone living in CA whose house value has more than doubled in the past 7 years and suddenly has 50% of their net worth in their house even though they’re not paying additional property taxes and they’re not planning on selling and they still only owe half of that. It is true that they could tap that equity, but then they would owe potentially a dangerous amount of money should the economy take a nose-dive. There’s a lot of balancing risk stuff going on when thinking about these issues. I’m not sure there is a good one-size-fits-all rule.

    • October 4, 2017 7:27 am

      I agree there isn’t a rule-of-thumb, and there doesn’t need to be. I think balancing equity that you put in (not growth) vs equity in other investments is a useful thing to think about, but there is not a lot of action to be taken.

  5. October 4, 2017 10:24 am

    Previously we were at 32% in real estate (including my investment property) which was a touch high for my comfort but it’s now dropped to 18%.

    Most of the shift went into cash but that mortgage is going to drop again when I make a large prepayment (woo) and then the rest of the money will be in cash until I figure out what path to take with our investments. It’s sort of nice that the investments are at an all time high of 49%! But it’s giving me a greater sense of urgency that we need to get our emergency preparation in order AND I need to be investing with greater tax optimization.

    • October 4, 2017 11:48 am

      18% sounds fantastic, especially for a high cost area!

      Large pre-payments are so much fun to plug into the amortization calculator 🙂

      • October 5, 2017 10:17 am

        I should point out that the 18% would be ideal for us EXCEPT that what it really represents is that we only actually own 18% of our 1M+ total valued properties which means we’re mostly in debt on that front. It feels like a lose-lose, either we owe $800k+ or we reduce that debt substantially and thus increase our RE exposure above that 18%. I’m going to play with the numbers a bit more to see what prepayments will do overall.

        • October 5, 2017 10:50 am

          Yeah, I guess these areas are somewhat lose-lose if you look at both metrics. If it were me (it sort of is a similar situation for us), I would reduce debt and increase RE exposure, limiting it around 30% or so. But there are no one-size-fits-all rules and lots of acceptable ways to do it!

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