Does Home Equity Count Towards Net Worth?
Home equity is a significant part of your net worth, but it functions differently than other assets. This overview clarifies its role in your finances.
Yes, home equity is a component of your total net worth. This article explains the concepts of net worth and home equity, how to calculate these figures, and how home equity functions within your overall financial standing.
Defining Net Worth and Home Equity
Net worth provides a snapshot of your financial position, calculated by subtracting your total liabilities from your total assets. Assets are everything you own with monetary value, while liabilities are all of your outstanding debts. Common assets include cash, investments, retirement funds, and real property, while liabilities include mortgages, car loans, student loans, and credit card balances.
Home equity represents the portion of your home’s value that you own. It is the current market value of your home minus the outstanding mortgage balance. For example, if your home is valued at $400,000 and you owe $250,000 on your mortgage, your home equity is $150,000. This figure reflects the value you would receive if you were to sell the home and pay off the mortgage today.
As you make mortgage payments, you decrease your liability and increase your equity, assuming the home’s value remains stable or increases. Home equity is an asset and a direct input into the net worth calculation.
Calculating Your Net Worth
To calculate your net worth, first compile a list of your assets. Gather the current value of your checking and savings accounts from bank statements and the value of investments from brokerage statements. Also include the total value of retirement accounts like 401(k)s and Individual Retirement Accounts (IRAs).
Your primary residence is a major asset. To determine its value, you can use online estimators for an approximate figure or obtain a formal appraisal for a more precise number. Remember to include the value of other property, such as vehicles or any other real estate you own.
Next, create a list of all your liabilities. The largest liability for most homeowners is their mortgage; find the outstanding balance on your loan statement. You must also gather the current balances for all other debts, including auto loans, student loans, and credit card balances.
Finally, subtract your total liabilities from your total assets to find your net worth. For instance, if your assets (home, savings, investments) total $600,000 and your liabilities (mortgage, car loan, credit card debt) total $350,000, your net worth is $250,000.
The Role of Home Equity in Your Financial Picture
While home equity is part of your net worth, it is an illiquid asset, unlike cash or stocks. Illiquidity means an asset cannot be converted into cash quickly without potentially losing value, and your home’s equity is tied up in the physical property.
Accessing the cash value of your home equity is not as simple as a bank withdrawal. To convert this equity into spendable funds, you can either sell the property or borrow against it. Selling a home involves a lengthy process of listing, marketing, and closing, which can take months. Borrowing against it through a home equity loan or a home equity line of credit (HELOC) requires applying for new debt and involves credit checks, appraisals, and closing costs.
Because of its illiquidity, your net worth might be high on paper, but your ability to cover immediate expenses with that wealth is limited. Home equity is not readily available for daily spending or emergencies, which is an important factor in assessing your financial flexibility.