Home equity factored into net worth?

[radtek2112]

Just curious, who takes into account their home equity/paid off mortgage into their net worth?  Why or why not?

[Left]

not really, unless I have a heloc on it. I just count things that are actually "making" money in net worth. The house is as much use as the food in the pantry for counting net worth, essentially zero. It keeps you dry and happy, but that's where it's usefulness ends until you sell it. A house price going up isn't really making money because it's still tied up until you sell it. You could say that about stocks too but I can sell portions of it off, and I can't very well sell the left wall of my house if I need cash.

[scrubbyfish]

I counted the amount I would be able to sell it for super fast and certainly.

[soccerluvof4]

I am partially with scrubbyfish on this one. Mentally i keep in mind its value that i could sell it for in a hurry but i don't have it entered in mint or anything like that.

[Kris]

My equity is likely small enough that I don't count it.  But in my case, I would count it if I knew it to be at least, say, $20,000 after the costs associated with selling. But that's only because we plan to move and sell when we FIRE. If I was planning to stay in the house for the duration, I wouldn't count it, because the money wouldn't actually be available for my use.

[MDM]

Just curious, who takes into account their home equity/paid off mortgage into their net worth?  Why or why not?

For the net worth of our estate, yes - because that's how the IRS will view it.

For the net worth of our investments, no - because we don't plan to sell it.

[Davids]

A classic debate that happens on this site. The value of your home is an asset while the balance on your mortgage is a liability so yes I do include it in my net worth. I don't view my primary residence as an investment (I have owned my home for 5 years and the value at best may have gone up a few grand since I bought it) but I include it in my net worth calculation. Now what I do not do that some do is I do not include the value of my car in my net worth calculation.

[MaryInMichigan]

I definitely include it: we'd use the value to rent or buy another roof over our heads when we sell.

In "Assets" on our balance sheet, it's under "Property" which also includes Furniture that could be sold, Jewelry, and our Car. (We have other assets: "Financial: Contingent" = cash value of life insurance; "Financial - Restricted" = our retirement accounts; "Financial: Liquid" = bank accounts and non-retirement investment accounts that could be sold.)

For "House - Walk-away Cash" I calculate selling price (I split the difference between eppraisal.com and Zillow.com), minus commission and selling costs, minus prep costs (painting, repairs, updating), minus mortgage and HELOC payoffs, to arrive at "walk-away cash." We're retired and have no debt on the house to pay off. If we did, I'd count it only once under "House" and not again under "Liabilities" which for us are only year-end credit card balances.

If I were much younger, I'd still include it, to enjoy the payoff number going down and the walk-away number going up when I update the balance sheet every New Year's Day.

[steveo]

Its definitely part of my net worth but I don't consider it in my FI calculations as an asset. The reason that I don't include it as an asset is that I also do not include the cost of rent within my expenses. I include the mortgage as part of my debt and hence a negative asset on my path to FI.

[swick]

Its definitely part of my net worth but I don't consider it in my FI calculations as an asset. The reason that I don't include it as an asset is that I also do not include the cost of rent within my expenses. I include the mortgage as part of my debt and hence a negative asset on my path to FI.

This is what we do as well. we don't factor in our house when we are planning what we need for FI Money - although we do have a rental suite and are still trying to figure out exactly where that factors in. We aren't banking on the income (as it is always possible one set of parents may move in rent free or low rent) but instead using it in the meantime to achieve the numbers we want faster then our projections instead of factoring it in.

[Retired To Win]

Its definitely part of my net worth but I don't consider it in my FI calculations as an asset. The reason that I don't include it as an asset is that I also do not include the cost of rent within my expenses. I include the mortgage as part of my debt and hence a negative asset on my path to FI.

Yes on this.  We too count home equity as an asset on the balance sheet, but not as part of the FIRE stash.

[Roland of Gilead]

Not this topic again.  Must. Stay. Away.

No, I can't...

Net worth includes all items and possessions that have value minus liabilities.   Yes, this includes your 14 year old cat if you can sell it for a profit.   If you decide to exclude items because they are not currently generating income, then that is fine, but you are no longer talking about net worth.  It is understandable if you do not want to include items such as said cat value because it is a small amount, but usually a home value is a significant portion of one's net worth.

[bdoubleu]

Not this topic again.  Must. Stay. Away.

No, I can't...

Net worth includes all items and possessions that have value minus liabilities.   Yes, this includes your 14 year old cat if you can sell it for a profit.   If you decide to exclude items because they are not currently generating income, then that is fine, but you are no longer talking about net worth.  It is understandable if you do not want to include items such as said cat value because it is a small amount, but usually a home value is a significant portion of one's net worth.

Finally, a stretch of logical explanations regarding net worth.  Net worth should not be a "well, I decide to count this, but not that."  It's a black and white definition:  assets minus liabilities equals net worth.  And asset does not necessarily mean "income-generating object."

The question is not "do you count your home equity in your FIRE calculations."  That answer is typically no.  But that question is not addressing how you calculate your "net worth."

[Sayonara925]

Umm...what's the purpose of calculating net worth anyway?  Whether you include the value of your home, cars, furniture, etc....why does it matter?  Am I missing something here?

[horsepoor]

I keep it in mind because selling it and downsizing to something we could pay cash for is pretty attractive.  It's not accounted for on SWR of course, but the mortgage is a large part of current living expenses, so without it, FI comes at a much lower cost (like $240,000 less).

[Roland of Gilead]

Umm...what's the purpose of calculating net worth anyway?  Whether you include the value of your home, cars, furniture, etc....why does it matter?  Am I missing something here?

It is a reasonable figure one can use to track their financial progress in life.  Generally if your net worth is increasing YoY you are likely in positive financial health.

[aspiringnomad]

Is everyone here planning to die in their current home? If not, then it should be fairly obvious why you'd want to have at least a vague idea of how much equity you have in it. If you ever, at any point during your years decide to sell your home, it will influence the speed with which you attain FIRE and/or your ability to spend during FIRE. Even if you don't sell your home before you die, the amount of equity you have or don't have very obviously impacts your financial freedom, either through complete principal paydown or through other less common ways to benefit from it.

This question has been discussed ad nauseam here, but I guess I keep responding in the hopes that otherwise financially savvy mustachians understand the objectively accurate way to account for their assets and liabilities (even if they decide not to apply it in their personal calculations).

[wisermiser]

I too am a bit puzzled why so many don't count home equity in net worth.  Even if you never sell it meets the definition of an investment IMO.  When I bought my house I was betting it would cost me less than renting the equivalent over the time span I intended to own it.

[TomTX]

House is part of net worth. Any mortgage is part if net worth too (negatively)

I don't count the house directly as part of my FIRE stash.  However, I do consider the lack of a mortgage payment when figuring my annual expenses during FIRE.

[AlwaysBeenASaver]

I've never actually had any reason to calculate my net worth, but, if I did, I'd count my home equity for sure. What I've always calculated is my FI $$, to determine when I can FIRE, and I haven't included my home value in that since I don't plan to sell it or take out a heloc, so I can't include the equity in my withdraws for $ to live on.

[Retire-Canada]

The only number I really care about is the value of my liquid investments as that will determine when I am FIRE.

I think of my home equity as a line of defence if I ever needed money and couldn't get it from my investments. Especially towards the end of my FIRE window if I started to get low on $$ I could sell the house and move to an apartment and live off its value for a decade or two should I need to.

- Vik

[mathlete]

I understand why people don't, but I definitely do.

A home with positive equity in it will usually either turn into an asset that you sell for cash at some point, or a monthly annuity that pays you the amount of money you would otherwise be paying in rent once it is paid off.

[clarkfan1979]

If you are willing to sell it, count it. If you are never going to sell it, then don't count it.

[arebelspy]

Net worth includes all items and possessions that have value minus liabilities.   Yes, this includes your 14 year old cat if you can sell it for a profit.   If you decide to exclude items because they are not currently generating income, then that is fine, but you are no longer talking about net worth.  It is understandable if you do not want to include items such as said cat value because it is a small amount, but usually a home value is a significant portion of one's net worth.

Bingo.

It absolutely should be counted.

No, it often isn't counted as part of your FIRE stache, because it's not part of your investment portfolio (and perhaps should/shouldn't be counted, depending on your draw down strategy).  That's a separate question.  But it's definitely part of your net worth. Whether you intend to sell--or not--is not relevant.  Whether you have a mortgage--or not--is irrelevant (aside from counting the mortgage, if you do have one, against the value).  It's an asset (and possibly netting to a liability after the mortgage if you're underwater).  How you count it is up to you (some include selling costs, some don't; some reduce the value to what they'd get if they had to sell immediately, some don't).  But it's definitely an asset.

If you are willing to sell it, count it. If you are never going to sell it, then don't count it.

Like I said above, irrelevant. To illustrate: should I not count any stocks I'm holding that I plan to never sell?

If I have a paid off house worth 1MM, and a stock portfolio worth 1MM kicking off 3% dividends (and like the MMM family, spend about 25k annually without housing costs, so that 30k from dividends covers my spending), and I never intend to sell either, is my net worth $0, because I'm not willing to sell any of it?

Of course not.  Net worth is 2MM.  That's what I'm worth (on paper).  FIRE portfolio is 1MM.

Naturally some don't include it in their FIRE portfolio.  But to not count it in your net worth means you are no longer calculating net worth, but some other number.  That's fine, but don't try to convince us that what you're calculating is net worth.  It's not.  :)

[Otsog]

Kill this topic.  Kill it with FIRE.

We need a sticky or something.  It's like a weekly event.

[radtek2112]

Sorry for bringing it up.  I should have done a search first.  I probably should of asked if I should include the house value when calculating your FIRE stash.  It doesn't look like you should, and I agree with that consensus.  I don't plan on selling and living in a van down by the river any time soon, so I won't include it in my FIRE stash.  Thanks for all the great responses.