I found this article today on Money Musings about the pitfalls of trying to refinance your mortgage when you have a 2nd or HELOC on the house:

A significant number of my personal acquaintances purchased homes (newer, larger) within the last several years. Inevitably, they were also convinced that financing via an 80/20 first/second mortgage setup was the way to go. Doing so is “financially smart,” because it allows them to avoid paying private mortgage insurance.

It’s an idea that works … until it doesn’t. Consider this Baltimore resident’s story, for instance:

Baltimore Sun: “Some Lenders Block Refi Ability”

He needs to refi out of his nasty ARM first mortgage — he’s lucky, in that he does have decent equity in his home — but his second-mortgage holder won’t agree to a re-subordination.

Under any circumstances.

I think the 80/10/10 is more common here in the Bay Area, or at least was, back in 2003/2004.  The 80/10/10 is  80% first mortgage, 10% HELOC, and 10% down payment.  No mortgage ensurance, and you get a HELOC which can be useful if you need to tap assets for some reason.

This is a pretty good example of how liquidity in a market like mortgages which isn’t centrally brokered can quickly jam up.

I’ve also seen stories lately of banks literally calling due their HELOC loans with fairly short notice.  Seems to be tied to people who are underwater on their houses (debt is greater than value of house). Not a good thing if you don’t have the liquidity to cover the outstanding balance, or if you were depending on your HELOC as an emergency fund.

Another lesson on why, in the end, liquidity can be one of the most important aspects of personal finance.   People tend to focus on rates of return, which of course, is a good thing to focus on.  But when you need money, it’s amazing how rates of return give way to the simple ability to tap assets for cash.