Should I include my home value in net worth calculations?

Should You Include Your Home Value in Net Worth Calculations?

Calculating your net worth is a fundamental step in understanding your financial health. It gives you a snapshot of your assets minus liabilities, helping you make informed financial decisions. But when it comes to including the value of your home, things can get a bit tricky. Should you count it, and if so, how should it be calculated? Let’s dive into the details.

Understanding Net Worth and 💡 Definition:The portion of your home's value that you actually own (market value minus mortgage balance)Home Equity💡 Definition:The portion of your home's value that you actually own, calculated as home value minus remaining mortgage balance.

At its core, net worth is defined as the total value of your assets minus your liabilities. Assets include cash, investments, real estate, and more, while liabilities cover debts, including mortgages. So, where does your home fit into this equation?

• Home as an Asset💡 Definition:An asset is anything of value owned by an individual or entity, crucial for building wealth and financial security.: Your home is indeed an asset. To include it in your net worth, calculate the home equity, which is the 💡 Definition:Fair value is an asset's true worth in the market, crucial for informed investment decisions.market value💡 Definition:The total value of a company's outstanding shares, calculated by multiplying share price by the number of shares. of your home minus any outstanding mortgage balance.

• Liabilities Count: Remember, the mortgage is a liability💡 Definition:A liability is a financial obligation that requires payment, impacting your net worth and cash flow.. You must subtract this debt from your home’s value to find the true equity.

For example, if your home is valued at $400,000 and you owe $150,000 on your mortgage, your home equity would be $250,000. This equity can be part of your net worth calculation.

Valuing Your Home Correctly

When including your home in net worth calculations, it's crucial to use a realistic valuation. Here are some tips:

• Market Value Adjustments: While online estimates from sources like Zillow provide a starting point, consider discounting the market value by 10-20%. This accounts for realtor fees, closing costs💡 Definition:Fees to finalize home purchase—2-5% of home price. Includes appraisal, title insurance, attorney, origination, taxes. Plan $10K on $300K home., and possible repairs if you were to sell.

• Conservative Approach: Using a lower estimate helps avoid overestimating your net worth and gives a more conservative, realistic financial picture.

Here’s a quick example using a conservative estimate:

Real-World Scenarios

Consider a homeowner whose financial picture includes:

• Home valued at $425,000
• Mortgage of $190,000
• Additional $152,000 in retirement💡 Definition:Retirement is the planned cessation of work, allowing you to enjoy life without financial stress. accounts

Using a conservative valuation, the homeowner might discount the home value by 15%, resulting in a net worth calculation as follows:

• Adjusted Home Value: $361,250
• Home Equity: $171,250
• Total Net Worth💡 Definition:Total assets minus total liabilities—the true measure of your financial health (including home equity): Retirement accounts + Home Equity = $323,250

By including the home, the homeowner gets a comprehensive view of assets, but remember this figure includes illiquid assets.

Common Considerations

When deciding whether to include your home in net worth calculations, keep these points in mind:

• Liquidity💡 Definition:How quickly an asset can be converted to cash without significant loss of value Concerns: Home equity is not cash. Accessing it requires selling or borrowing against the home, which can take time and incur costs.

• Ongoing Expenses: Owning a home comes with continuous expenses like property taxes💡 Definition:Property taxes are mandatory fees on real estate, funding local services like schools and infrastructure. and maintenance, impacting the net financial benefit.

• Market Fluctuations: Home values can change, affecting net worth calculations over time.

• Purpose of Net Worth: Depending on your goal—whether assessing overall wealth💡 Definition:Wealth is the accumulation of valuable resources, crucial for financial security and growth. or focusing on liquid assets💡 Definition:Assets that can be quickly converted to cash without losing value—like savings accounts, stocks, and money market funds.—tailor your approach to include or exclude home equity.

Bottom Line

Including your home value in net worth calculations can offer a fuller picture of your financial health, but it’s important to do so accurately and conservatively. Consider using both calculations: one with and one without the home included, to understand your liquid net worth and financial flexibility. This dual approach provides insight into both total wealth and readily accessible resources, helping you make more informed financial decisions.