Home Sweet Home

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Home Sweet Home

I have to admit that I admire those who jump in early … writing these posts is no exception: by posting first, Scott – and now Ryan – are taking a chance. But, taking chances is what life is all about: jump in and see if the water’s fine … find out for yourself, don’t wait for somebody else to tell you πŸ™‚

I think there’s a flaw in Ryan’s reasoning around the 20% Rule – but, I’ll have to double-check his NetworthIQ profile to be sure – in the meantime, can anybody else see it?


I purchased my house in February 2007 for $685,000. It was just after everyone knew the bubble had popped, which is why we were able to purchase it for $65,000 less than it had previously been listed for (what we thought was a great deal!). Since then, it has dropped in value to around $630,000 (Yikes!), and we have paid off $20,000. This means we owe about $35,000 more than our house is worth.

My monthly “nut” for this house, including everything, is $4700 (hence the picture at the top of the post!). This is 34% of my net income, BUT, because my home is large enough to serve as my office as well (large dedicated space for storage of product, meetings, etc.), I do not have to lease another office. Therefore, my corporation pays me $1200/month for the use of that space, taking my gross house liability to $3500, or 25% of my net income.

As for the 20% rule, I would be right on with $101,000 net worth and $20,000 of mortgage paid off. BUT, the value has gone down, so technically the 20% rule says I should pay off $55,000 more, right? Though if that is the case, I would probably not follow the 20% rule due to my adherence to the 25% rule and not seeing any additional return on that investment (of course, my payment would go down, but it’s only at 5.25% and I can write off the interest). What do you guys think? What would you do?

As for our plans with this house, we will likely live here for another 8 years or so, until I retire with my number!

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I certainly wouldn’t pay an additional 55k on your home Ryan. I think what the 20% rule states is that you should should keep the equity in your home at LESS than 20% of your overall networth. I would think that for Money Making 201 purposes, one would want that number to be even less, perhaps, ideally at zero! Since this would be money that stays liquid and can be used to invest with.

With you having negative equity in your home right now, your home is currently contributing zero to you networth.

But, hopefully the next housing boom will begin soon and you can eventually use that regained equity to invest with and let it help you get to your number!

Ryan – I agree with Scott’s assessment of the 20% rule. The idea is to have less than 20% of your total net worth come from the equity in your home, not to be at exactly 20% net worth from equity at all times. As Scott alluded to, being in negative territory on your home means that 0% of your net worth is from home equity.

With that perspective, you are in compliance with the recommendations of both of Adrian’s views.

5.25% is still pretty cheap money, so I wouldn’t be spring loaded to refi and pay down even more to get back into positive territory. I agree with Scott’s approach to keeping the 55K liquid or invested elsewhere. At this point, your housing situation is a paper loss that will only be realized if you sell the home and pumping more money into it (55K + closing costs) won’t make it more profitable in my eyes. Maybe you could raise the rent on your employer. πŸ™‚

I have my fingers crossed for your local housing market.
Good luck and thanks for sharing – Jeff

Uh, am I off or wouldn’t the house now actually have a negative impact on his net worth? if he owes $675,000 (debt column) on an asset worth $630,000, then it drains his net worth by the difference, yes?

I wonder where we all would be if the RE mkt had continued to go up instead of dropping? Perhaps then we would be over the 20% of NetWorth…

I think it’s good to be at 25% as you are, Ryan, but would also think about refi at a point where it makes sense to take the money out of the house to invest elsewhere (you already have control over the property which seems to be the biggest thing) – where it costs less to take money out (the rates, closing costs, etc.) Before long, buyers will be buying up Calif again – just maybe not Americans. But in the meantime, 3-5 years is when you might want to refi and pull some out for the big dream (life’s purpose), if that works with your timeline.

Sorry for the confusion guys. My net worth, accounting for the negative equity, is $101,000. What I was saying is that I put $20,000 down which, if my home’s value did not sky dive, would have put me at 20% of my net worth in home equity.
Thanks to all for the advice!

Ryan, your doing just fine. The last thing you would want to do(which I’m sure you already know) is to pay one dime extra to your mortgage. It’s just a product of the housing bubble and it will correct itself.

In the meantime, I would continue to pay the bare minimum on that mortgage, month after month, and just save, save, save, while you work on your growth engine ideas. While you are putting together your engine, your savings are building up fast to use to fund those business ideas to get them off the ground as well as fund well-researched, individual stocks in companies that you know something about and love, real estate or whatever will be necessary to provide you your required annual growth compound rate. Good luck man!

@ Ryan – Scott is right: you don’t want to pay down your mortgage … in fact, you aren’t really increasing equity in your house by paying down the mortgage (well, technically you are, but in practice you are not) … rather, you are just moving equity from your CASH account to your MORTGAGE account.

You can’t spend ‘house’; nor can you invest ‘house’, so it’s not something we would want to do, just to fit into some ‘rule’.

You are in a common situation, being ‘upside down’ on your mortgage right now … not ideal, but recoverable in time. I am upside down on my house(es) right now, to the tune of at least $1 mill. but, I’m not panicking as long as I have enough income to live off, and neither should you.

The real ‘cost’ is that you do not have that money in cash to take advantage of the new investment opportunities that have opened up … but, you do have cash + retirement accounts available, if something juicy does come along.

So, you are like a ‘first home buyer’: likely to be breaking the 20% Rule … this is not a bad thing as long as you don’t intend to trade up or put more money into the house (renovations; a new deck perhaps? Forget it!).

It’s great that you fit into the 25% Income Rule … but, you can see the trouble you will be in, if you need to change jobs and no longer receive the ‘rental’ income. At that point, I would say: “trade down to something that DOES fit within the 25% Income Rule”.

Diane is also right: when the RE market does come back, start to keep an eye on the equity that you will (hopefully) build up in the house, with an eye to pulling some out … however, you can easily see that means borrowing more, so you will need to hope that your income has also gone up by then, so that you don’t break the 25% Income Rule.

See how these ‘rules’ work together to help us make sound decisions on the biggest (non-business) asset that most of us are ever likely to have?

[…] Ryan isn’t sure whether he bought the ‘bargain’ home that he thought he was getting; should he pay down the mortgage to compensate? Read the post – and the comments – then let us know (either here or there) what you think? […]

I think we may be stuck in a rut where growing wealth via investments will prove to be more liability than upside.

Make sure you have a strategy to preserve your capital before rushing to maximize your investments.


@ Mike – These guys might argue the point with you πŸ™‚