Should you include home equity in Net Worth?

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justsomeguy2018
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Should you include home equity in Net Worth?

Post by justsomeguy2018 » Tue May 12, 2020 6:56 pm

Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?

Triple digit golfer
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Re: Should you include home equity in Net Worth?

Post by Triple digit golfer » Tue May 12, 2020 6:57 pm

Yes, absolutely.

Market value less mortgage.

Selling expenses are expenses, not an asset or liability.

AlohaJoe
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Re: Should you include home equity in Net Worth?

Post by AlohaJoe » Tue May 12, 2020 7:02 pm

justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
What's the point of your "net worth" calculation? To brag to your friends at the golf course? Sure, go ahead and include it. To decide when to retire? Probably don't include it.

Otherwise...it depends on what you're calculating "net worth" for. Are you also including the present value of future Social Security payments? The human capital of your future earnings? Your car and household possessions? Your wedding rings?

There are valid arguments for and against each of those things. It depends entirely on what you're going to use "net worth" for.

If you're just tracking it in a spreadsheet that nobody else will ever look at...it doesn't matter what you decide.

KyleAAA
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Re: Should you include home equity in Net Worth?

Post by KyleAAA » Tue May 12, 2020 7:05 pm

Yes, it should. I net equity with selling expenses because I'm more interested in the liquidation value. The expenses are material and there is no way to avoid them.

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justsomeguy2018
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Re: Should you include home equity in Net Worth?

Post by justsomeguy2018 » Tue May 12, 2020 7:07 pm

KyleAAA wrote:
Tue May 12, 2020 7:05 pm
Yes, it should. I net equity with selling expenses because I'm more interested in the liquidation value. The expenses are material and there is no way to avoid them.
This is my thinking too....what % do you use for selling expenses? I think I use 7% to 8%.

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FrankTheViking
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Re: Should you include home equity in Net Worth?

Post by FrankTheViking » Tue May 12, 2020 7:08 pm

justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
I would. Net worth is net worth. Otherwise use a different metric.
No EF. 80% Total U.S. / 20% Total International. 100% equity. Is there a gun to your head? Is there a tiger in the room? No? What's the problem?

Wanderingwheelz
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Re: Should you include home equity in Net Worth?

Post by Wanderingwheelz » Tue May 12, 2020 7:08 pm

AlohaJoe wrote:
Tue May 12, 2020 7:02 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
What's the point of your "net worth" calculation? To brag to your friends at the golf course? Sure, go ahead and include it. To decide when to retire? Probably don't include it.

Otherwise...it depends on what you're calculating "net worth" for. Are you also including the present value of future Social Security payments? The human capital of your future earnings? Your car and household possessions? Your wedding rings?

There are valid arguments for and against each of those things. It depends entirely on what you're going to use "net worth" for.

If you're just tracking it in a spreadsheet that nobody else will ever look at...it doesn't matter what you decide.
I include our approximate home equity when I figure my net worth and I also include it in my retirement planning, but not for any income purposes since we have no plans to rent it, even when we’re gone for months at a time. Personal Capital uses the Zestimste which is good enough for me.

Triple digit golfer
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Re: Should you include home equity in Net Worth?

Post by Triple digit golfer » Tue May 12, 2020 7:10 pm

KyleAAA wrote:
Tue May 12, 2020 7:05 pm
Yes, it should. I net equity with selling expenses because I'm more interested in the liquidation value. The expenses are material and there is no way to avoid them.
True, but then that's not net worth.

vasaver
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Re: Should you include home equity in Net Worth?

Post by vasaver » Tue May 12, 2020 7:11 pm

justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
What about pre-tax accounts? Do you include the total or estimate after taxes are paid?

kmok
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Re: Should you include home equity in Net Worth?

Post by kmok » Tue May 12, 2020 7:11 pm

You should include it in your net worth. I would suggest you calculating it using the estimated value of house less the amount owed.

oldfort
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Re: Should you include home equity in Net Worth?

Post by oldfort » Tue May 12, 2020 7:12 pm

Yes, why wouldn't you?

SteadyOne
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Re: Should you include home equity in Net Worth?

Post by SteadyOne » Tue May 12, 2020 7:17 pm

:idea:
AlohaJoe wrote:
Tue May 12, 2020 7:02 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
What's the point of your "net worth" calculation? To brag to your friends at the golf course? Sure, go ahead and include it. To decide when to retire? Probably don't include it.

Otherwise...it depends on what you're calculating "net worth" for. Are you also including the present value of future Social Security payments? The human capital of your future earnings? Your car and household possessions? Your wedding rings?

There are valid arguments for and against each of those things. It depends entirely on what you're going to use "net worth" for.

If you're just tracking it in a spreadsheet that nobody else will ever look at...it doesn't matter what you decide.
The point is to know how much you will get when you sell it. So if you move to low cost area and buy cheaper house you will have certain amount of cash left that can be invested.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court

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bottlecap
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Re: Should you include home equity in Net Worth?

Post by bottlecap » Tue May 12, 2020 7:17 pm

Of course. Equity is by definition part of your net worth.

JT

runner3081
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Re: Should you include home equity in Net Worth?

Post by runner3081 » Tue May 12, 2020 7:17 pm

Yes, it should be. Net worth is no more than a metric to track progress.

The numbers that really matter as part of net worth are investment and retirement accounts, at least for me.

stan1
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Re: Should you include home equity in Net Worth?

Post by stan1 » Tue May 12, 2020 7:18 pm

For net worth yes of course, but I do pre-deduct likely sales costs (4.5% commission and $10K of fix ups).

For investable assets and asset allocation no. I think home value is a distraction from managing the rest of my portfolio but others like to include it.

We all can do whatever we want so long as we are honest with ourselves (and hopefully spouses) about these numbers and what they mean.

retiredjg
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Re: Should you include home equity in Net Worth?

Post by retiredjg » Tue May 12, 2020 7:24 pm

Your home equity is part of your net worth...just as your mortgage should be included on the liability side (or negative side) of your net worth.

You should give some thought about why you want to know your net worth and what you want to do with that number. I've never thought it was a very useful thing to know.

The size of your retirement portfolio might be useful to know. Your home equity is not part of that unless you intend to sell your home and live off the proceeds.

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ResearchMed
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Re: Should you include home equity in Net Worth?

Post by ResearchMed » Tue May 12, 2020 7:32 pm

Popcorn time!

:twisted:

RM
This signature is a placebo. You are in the control group.

HEDGEFUNDIE
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Re: Should you include home equity in Net Worth?

Post by HEDGEFUNDIE » Tue May 12, 2020 8:06 pm

Yes you should. From another thread:
Scenario 1
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 2
Assets:
Home value: $1.5M
Investments: $0.8M

Liabilities:
Mortgage: $0

Home equity: $1.5M
Net worth: $2.3M
Home equity as % of net worth: 65%

Where the rubber hits the road: if I posted my AA and revealed that 65% of my $2M+ net worth was in a single REIT, how many disapproving posts would I get from Bogleheads?

And yet, if I were to post that I paid off my house with cash, would anyone doubt that I would be praised to the high heavens?

The inconsistency is mindBoggling
Last edited by HEDGEFUNDIE on Tue May 12, 2020 8:11 pm, edited 2 times in total.

KlangFool
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Re: Should you include home equity in Net Worth?

Post by KlangFool » Tue May 12, 2020 8:10 pm

justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
justsomeguy2018,

If you have to ask this question, you are buying too much house. You have a bigger problem than whether you should count home equity as part of your net worth.

KlangFool

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Portfolio7
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Re: Should you include home equity in Net Worth?

Post by Portfolio7 » Tue May 12, 2020 8:26 pm

Of course it's part of Net Worth, but that's not really the point. You should be asking why do you care about your Net Worth? There is more than 1 valid answer, but as you think about your answer, you'll also be generating a framework to address your original question.

I include our home in our NW calculation at Zillow (less ten percent to account for price volatility and selling expenses.) The point is not to calculate it to the dollar. The point is to have an estimate of potential cash from selling it. Knowing your total resources is important to understanding your potential financial 'plan b' or 'plan c' if your financial status takes a big hit for whatever reason, or you decide to radically alter your living circumstances.

For retirement purposes I assume we will live in our current house or equivalent. Retirement analysis is based on actual savings put aside for that purpose, not on NW. If we eventually downsize, the excess value over a new place would be a bonus to our financial position. I don't want to assume a future benefit that is tentative at best.
"An investment in knowledge pays the best interest" - Benjamin Franklin

adamthesmythe
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Re: Should you include home equity in Net Worth?

Post by adamthesmythe » Tue May 12, 2020 8:34 pm

No point. What you really need to know is how much it costs to operate your house, because that will be an expense in retirement.

Unless, of course, your plan is to realize some of the equity and move to a cheaper area.

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JoMoney
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Re: Should you include home equity in Net Worth?

Post by JoMoney » Tue May 12, 2020 8:35 pm

I don't know why you would, I certainly don't think you should "rebalance" your home equity or manage it as a portfolio allocation. But, everything you own can be added into your 'Net Worth'. The idea of 'net' implies you subtract out what you owe on the house. I would assess the gross house value of the house at whatever fair market value was, what you'd have to pay for a roughly comparable replacement.
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TechGuy365
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Re: Should you include home equity in Net Worth?

Post by TechGuy365 » Tue May 12, 2020 9:14 pm

Yes it should be included. Mint even integrates with Zillow to pull an estimated value which is used to calculate your TNW along with your other investment accounts.

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Nate79
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Re: Should you include home equity in Net Worth?

Post by Nate79 » Tue May 12, 2020 9:15 pm

It is a part of net worth by definition. If you don't include it you are calculating something else entirely.

Xrayman69
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Re: Should you include home equity in Net Worth?

Post by Xrayman69 » Tue May 12, 2020 9:27 pm

Yes. We have 80% equity in main home and 50% equity in second home. The bank would likely provide us a loan if desired using these as collateral.

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2pedals
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Re: Should you include home equity in Net Worth?

Post by 2pedals » Tue May 12, 2020 9:50 pm

What is the purpose of calculating your net worth? If you are trying determine if you have saved enough for retirement such as 25x or 30x spending I would generally not. If you are certain that you will be selling and moving to a lower cost of living area from a HCOL area with a significant difference in housing prices, the difference can be included.

Agent007
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Re: Should you include home equity in Net Worth?

Post by Agent007 » Tue May 12, 2020 9:50 pm

AlohaJoe wrote:
Tue May 12, 2020 7:02 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
What's the point of your "net worth" calculation? To brag to your friends at the golf course? Sure, go ahead and include it. To decide when to retire? Probably don't include it.

Otherwise...it depends on what you're calculating "net worth" for. Are you also including the present value of future Social Security payments? The human capital of your future earnings? Your car and household possessions? Your wedding rings?

There are valid arguments for and against each of those things. It depends entirely on what you're going to use "net worth" for.

If you're just tracking it in a spreadsheet that nobody else will ever look at...it doesn't matter what you decide.
If you make something a metric and measure it every day, you'll find yourself trying to move the metric in the direction that you want. The other side of this is also true - if you never measure something you'll find it virtually impossible to make a dent in it.

There were times in my life when I didn't measure net worth and honestly, I didn't know whether this line was going up, going down, or just flat. This also leads to a bunch of unnecessary stress later on when the dollar figures start getting large and/or you start making bigger life decisions. The more stressful times were when I had multiple properties and multiple leases and there was just massive cash going in and out all the time.

Break down your investments into categories and understand if your decisions are helping or hurting relative to each other. When I started to do this, I figured out when and where I was hurting myself and stopped doing it. I also started to identify areas I was being smart (or lucky or both) and doubled down.

Personally, I don't mind you take simple pleasure in the top line number. If it gets you to start writing it down every other day, then great. Sooner or later you'll dig a litter deeper and start to figure out what is driving this number up (or down).

Glasgow
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Re: Should you include home equity in Net Worth?

Post by Glasgow » Tue May 12, 2020 10:07 pm

Yes but I deduct 10% for commission, fix up and some transfer tax, etc. 50% price of retirement home when kids have their own nests and we downsize.
Let's say the house is $1M, so targeted retirement home would be $500K.
10% for commission, fix up and some xfer taxes = $100K
So, our equity accounted for net worth is $1M - $500K - $100K = $400K

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LilyFleur
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Re: Should you include home equity in Net Worth?

Post by LilyFleur » Tue May 12, 2020 10:12 pm

Technically it is part of one's net worth, but functionally I do not count it. I would never pull money out of my home to invest, so it is currently in use as a place for me to live. My home equity is earmarked for nursing home care, if needed. If not, my children will inherit it.

The number I track more closely is my portfolio. The only relevance my home equity has to my portfolio is that I will not invest in real estate/REITs in my portfolio, because my home equity in a VHCOL area is already a large % of my net worth.

HEDGEFUNDIE
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Re: Should you include home equity in Net Worth?

Post by HEDGEFUNDIE » Tue May 12, 2020 10:17 pm

LilyFleur wrote:
Tue May 12, 2020 10:12 pm
Technically it is part of one's net worth, but functionally I do not count it. I would never pull money out of my home to invest, so it is currently in use as a place for me to live. My home equity is earmarked for nursing home care, if needed. If not, my children will inherit it.

The number I track more closely is my portfolio. The only relevance my home equity has to my portfolio is that I will not invest in real estate/REITs in my portfolio, because my home equity in a VHCOL area is already a large % of my net worth.
But isn’t that the inconsistency?

You’re acknowledging that home equity can pay for things just like your portfolio can pay for things. If you could diversify your home equity such that you greatly reduce the volatility risk of not having enough money to pay for nursing home care, wouldn’t you take that in a heartbeat?

Hint: you can, it’s called taking out a mortgage and investing your home equity in your regular AA.

Balance1969
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Re: Should you include home equity in Net Worth?

Post by Balance1969 » Tue May 12, 2020 10:33 pm

KlangFool wrote:
Tue May 12, 2020 8:10 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
justsomeguy2018,

If you have to ask this question, you are buying too much house. You have a bigger problem than whether you should count home equity as part of your net worth.

KlangFool
There are a couple of possibilities why the OP is not buying too much resulting in a bigger problem.

One is based on a good friend of mine who is extremely risk adverse. He believes in paying off his house and investing in T-bills. He also makes a nice salary. Once he paid off his house, he was happy as a clam and really didn't seem to have big problems. Unless you believe it is a big problem to have a different belief in what one should do with their money than you.

Another is based on younger people who bought their first house half a decade ago and are still building up their portfolio. They might have $50k in their house and $50k in their 401(k) (ignore the actual numbers, you get the point).

I might have missed why they want to include their home in their net worth, but those two instances seem like legitimate reasons to think about including it in your net worth, not buying too much house, and not having a bigger problem.

I could be wrong.

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LilyFleur
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Re: Should you include home equity in Net Worth?

Post by LilyFleur » Tue May 12, 2020 11:01 pm

HEDGEFUNDIE wrote:
Tue May 12, 2020 10:17 pm
LilyFleur wrote:
Tue May 12, 2020 10:12 pm
Technically it is part of one's net worth, but functionally I do not count it. I would never pull money out of my home to invest, so it is currently in use as a place for me to live. My home equity is earmarked for nursing home care, if needed. If not, my children will inherit it.

The number I track more closely is my portfolio. The only relevance my home equity has to my portfolio is that I will not invest in real estate/REITs in my portfolio, because my home equity in a VHCOL area is already a large % of my net worth.
But isn’t that the inconsistency?

You’re acknowledging that home equity can pay for things just like your portfolio can pay for things. If you could diversify your home equity such that you greatly reduce the volatility risk of not having enough money to pay for nursing home care, wouldn’t you take that in a heartbeat?

Hint: you can, it’s called taking out a mortgage and investing your home equity in your regular AA.
I'm aware, and I understand that is your approach. I respect your choice.
Without knowing the life circumstances which inform my choices, it may look inconsistent from where you are in life, but for me, it makes sense. I've take some pretty big risks to get where I am, but I don't risk my home.

rascott
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Re: Should you include home equity in Net Worth?

Post by rascott » Tue May 12, 2020 11:39 pm

retiredjg wrote:
Tue May 12, 2020 7:24 pm
Your home equity is part of your net worth...just as your mortgage should be included on the liability side (or negative side) of your net worth.

You should give some thought about why you want to know your net worth and what you want to do with that number. I've never thought it was a very useful thing to know.

The size of your retirement portfolio might be useful to know. Your home equity is not part of that unless you intend to sell your home and live off the proceeds.

It's pretty useful for your heirs :happy

Swivelguy
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Re: Should you include home equity in Net Worth?

Post by Swivelguy » Wed May 13, 2020 12:24 am

HEDGEFUNDIE wrote:
Tue May 12, 2020 8:06 pm
Yes you should. From another thread:
Scenario 1
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 2
Assets:
Home value: $1.5M
Investments: $0.8M

Liabilities:
Mortgage: $0

Home equity: $1.5M
Net worth: $2.3M
Home equity as % of net worth: 65%

Where the rubber hits the road: if I posted my AA and revealed that 65% of my $2M+ net worth was in a single REIT, how many disapproving posts would I get from Bogleheads?

And yet, if I were to post that I paid off my house with cash, would anyone doubt that I would be praised to the high heavens?

The inconsistency is mindBoggling
Oh come on, it's boldly clear that this is a false equivalence.

HEDGEFUNDIE
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Re: Should you include home equity in Net Worth?

Post by HEDGEFUNDIE » Wed May 13, 2020 12:28 am

Swivelguy wrote:
Wed May 13, 2020 12:24 am
HEDGEFUNDIE wrote:
Tue May 12, 2020 8:06 pm
Yes you should. From another thread:
Scenario 1
Assets:
Home value: $1.5M
Investments: $2.0M

Liabilities:
Mortgage: $1.2M

Home equity: $0.3M
Net worth: $2.3M
Home equity as % of net worth: 13%

Scenario 2
Assets:
Home value: $1.5M
Investments: $0.8M

Liabilities:
Mortgage: $0

Home equity: $1.5M
Net worth: $2.3M
Home equity as % of net worth: 65%

Where the rubber hits the road: if I posted my AA and revealed that 65% of my $2M+ net worth was in a single REIT, how many disapproving posts would I get from Bogleheads?

And yet, if I were to post that I paid off my house with cash, would anyone doubt that I would be praised to the high heavens?

The inconsistency is mindBoggling
Oh come on, it's boldly clear that this is a false equivalence.
Why?

Swivelguy
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Re: Should you include home equity in Net Worth?

Post by Swivelguy » Wed May 13, 2020 12:37 am

The assertion being made by "the inconsistency is mindboggling" is that bogleheads both:

1. Don't approve of holding a large portion of one's portfolio in large, undiversified real estate investments
2. Do approve of holding a large portion of one's portfolio in large, undiversified real estate investments, if doing so is framed as paying down a mortgage

The following fallacies are made to get there:

1. The fact is disregarded that you can't live in a REIT, but you can live in a house. A REIT is only useful as an investment, and will need to be sold to be consumed. A house can be consumed directly, effectively negating some of the risk it would otherwise hold as an undiversified investment.
2. A calculation is made that puts home equity in a numerator and net worth in a denominator. These are both pretty meaningless. If you want to talk about risk in a portfolio, the numerator would be asset class exposure (which is the whole home value, not the equity) and the denominator should be portfolio size (which is not the same for scenarios 1 and 2 because holding the mortgage provides leverage).
3. The evidence presented that paying off a mortgage is lauded by bogleheads comes from a thread not located in the actual investing forums of this site. Futhermore, no details of the poster's financial situation are included. For all we know, this praise could be heaped on someone who paid off their mortgage at age 95 after refinancing several times to extend the term. In their words, they "finally" paid off the mortgage. It is far from clear that this thread represents praise for paying off the mortgage early, or moving sizable portions of a retirement portfolio into home equity.

mortfree
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Re: Should you include home equity in Net Worth?

Post by mortfree » Wed May 13, 2020 12:40 am

I focus on 4 categories:
Retirement savings
Taxable Investments
Cash
Home equity

Then I run numbers with all four.

I figure out the percent of the total for each category.

Then when I don’t want to feel “rich” I subtract out the house.

When I want to feel “poor” I only look at taxable investments and cash.

HEDGEFUNDIE
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Re: Should you include home equity in Net Worth?

Post by HEDGEFUNDIE » Wed May 13, 2020 12:49 am

Swivelguy wrote:
Wed May 13, 2020 12:37 am
The assertion being made by "the inconsistency is mindboggling" is that bogleheads both:

1. Don't approve of holding a large portion of one's portfolio in large, undiversified real estate investments
2. Do approve of holding a large portion of one's portfolio in large, undiversified real estate investments, if doing so is framed as paying down a mortgage

The following fallacies are made to get there:

1. The fact is disregarded that you can't live in a REIT, but you can live in a house. A REIT is only useful as an investment, and will need to be sold to be consumed. A house can be consumed directly, effectively negating some of the risk it would otherwise hold as an undiversified investment.
2. A calculation is made that puts home equity in a numerator and net worth in a denominator. These are both pretty meaningless. If you want to talk about risk in a portfolio, the numerator would be asset class exposure (which is the whole home value, not the equity) and the denominator should be portfolio size (which is not the same for scenarios 1 and 2 because holding the mortgage provides leverage).
3. The evidence presented that paying off a mortgage is lauded by bogleheads comes from a thread not located in the actual investing forums of this site. Futhermore, no details of the poster's financial situation are included. For all we know, this praise could be heaped on someone who paid off their mortgage at age 95 after refinancing several times to extend the term. In their words, they "finally" paid off the mortgage. It is far from clear that this thread represents praise for paying off the mortgage early, or moving sizable portions of a retirement portfolio into home equity.
1. A REIT throws off dividends that can pay the rent, or a mortgage for that matter. Of course, all of that is irrelevant, it’s total return that matters, which you can use in any way you’d like. “Consuming a house” is just another way of saying that you are being paid the imputed rent of living there.

2. Asset class exposure is the same in both scenarios. If the house goes up in value by $100k, I gain $100k net worth regardless of whether I have a mortgage or not. The question is: what are the underlying risk/return fundamentals driving my net worth? It is indisputable that those fundamental net worth drivers are more diversified in an investment portfolio than in a single house.

3. The “investing forums of this site” are not where mortgage threads live, that would be the “Personal Finance” forum. And if you think mortgage payoff is not valued in and of itself around here, you haven’t been around long

Swivelguy
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Re: Should you include home equity in Net Worth?

Post by Swivelguy » Wed May 13, 2020 12:59 am

HEDGEFUNDIE wrote:
Wed May 13, 2020 12:49 am
1. A REIT throws off dividends that can pay the rent, or a mortgage for that matter. Of course, all of that is irrelevant, it’s total return that matters, which you can use in any way you’d like. “Consuming a house” is just another way of saying that you are being paid the imputed rent of living there.

2. Asset class exposure is the same in both scenarios. If the house goes up in value by $100k, I gain $100k net worth regardless of whether I have a mortgage or not. The question is: what are the underlying risk/return fundamentals driving my net worth? It is indisputable that those fundamental net worth drivers are more diversified in an investment portfolio than in a single house.

3. The “investing forums of this site” are not where mortgage threads live, that would be the “Personal Finance” forum. And if you think mortgage payoff is not valued in and of itself around here, you haven’t been around long
1. REITs are not highly correlated to residential real estate prices. It's quite possible that investor holding their portfolio strongly in a single REIT ends up not being able to pay their mortgage after that REIT's dividend and share price get clobbered. It's not possible that an investor with a paid off mortgage ends up unable to pay their mortgage. This is the reason why a REIT investment and a house are not on the same level of risk.

2. I agree. If the goal is to get net worth to $X in order to retire, it's generally best to hold a cheap mortgage rather than pay it down. This belief, while not 100% universal, is also not uncommon on these forums.

3. The example quoted above treats a house as an investment, not a mortgage as a consumer issue. I mean, the whole point is literally assigning the house as an analogue to a REIT. I would expect serious discussion of real estate investments to occur in the investment forums. Congratulations delivered at the passing of a life milestone are not that.

Anyway, we are off topic and both seem stubborn, so I will let you have the last word here.

DonIce
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Re: Should you include home equity in Net Worth?

Post by DonIce » Wed May 13, 2020 1:00 am

I have two columns in my spreadsheet, one including the home equity and one not including it. Why restrict yourself to just one metric?

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randyharris
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Re: Should you include home equity in Net Worth?

Post by randyharris » Wed May 13, 2020 1:17 am

justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
If you’re looking to track your total Net Worth, you absolutely have to include your home equity. If you want to be even more accurate, then yes, subtract about 10% of the estimated current value of your house to account for selling fees.

This is not a measuring contest as somebody mentioned earlier in the thread. Personally I own my home outright without no debt, ditto an investment property. Combined those two assets account for 40% of my total net worth, what’s the point of tracking my Net Worth if I’m not including huge assets? Even if a person doesn’t own their home outright, the equity could still be rather substantial.

I use Personal Capital to track my personal finances, I like how it syncs with Zillow to keep the current Zestimate value for your homes.

Additionally I keep a spreadsheet that I update at the end of each month of all our investments, I do not put our home on there because it is our home and not an investment, however, I do list the investment property at 95% of the Zestimate. (My wife is a real estate agent so we can sell for ½ the normal fees.)

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Ralph Furley
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Re: Should you include home equity in Net Worth?

Post by Ralph Furley » Wed May 13, 2020 6:16 am

Here's how I think: I am a business. Businesses need an Income Statement and a Balance Sheet. The Balance Sheet is a snapshot of assets and liabilities at a given point in time. Any debts need to be reflected in the liability column (ie a mortgage). If the liability is listed, the corresponding asset needs to be listed (if there is one) - hence the "balance" part of the balance sheet. So when I do this exercise, what shows up all the way at the bottom is my net worth.

Now, beyond that and an emotional satisfaction about my "net worth", it doesn't do me much good. As others have said, the wealth in your home doesn't help you fund a retirement necessarily. And, there is a reason those mailers ask, "Do you have over $500,000 or $1,000,000 in investable assets?" As a qualified or accredited investor, my home equity was NOT allowed in the calculations. There's a reason for that.

smitcat
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Re: Should you include home equity in Net Worth?

Post by smitcat » Wed May 13, 2020 7:42 am

KlangFool wrote:
Tue May 12, 2020 8:10 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
justsomeguy2018,

If you have to ask this question, you are buying too much house. You have a bigger problem than whether you should count home equity as part of your net worth.

KlangFool
Or...you need the net worth for some other reason like a business loan or multiple homes.

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Kenkat
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Re: Should you include home equity in Net Worth?

Post by Kenkat » Wed May 13, 2020 8:02 am

DonIce wrote:
Wed May 13, 2020 1:00 am
I have two columns in my spreadsheet, one including the home equity and one not including it. Why restrict yourself to just one metric?
Right, I think that people seem to get hung up on: including my home as part of my net worth because now it messes up my asset allocation or managing my portfolio or I don’t invest using my home equity, etc. Fine. If net worth doesn’t really do much to help you manage your finances, ignore it. Or track it separately, say “that’s interesting” and then use your portfolio balance to manage your investments. This is basically what I do in Quicken - it tracks your net worth and I look at it and say “oh, that’s interesting”. Then I quickly move on.

life in slices
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Re: Should you include home equity in Net Worth?

Post by life in slices » Wed May 13, 2020 8:14 am

DonIce wrote:
Wed May 13, 2020 1:00 am
I have two columns in my spreadsheet, one including the home equity and one not including it. Why restrict yourself to just one metric?
I do the same, tracking "total net worth" with equity in it and "liquid net worth" without it
Easy enough to do

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avenger
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Re: Should you include home equity in Net Worth?

Post by avenger » Wed May 13, 2020 8:15 am

I do.

But it doesn’t really matter as net worth is a completely useless metric.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

JackoC
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Re: Should you include home equity in Net Worth?

Post by JackoC » Wed May 13, 2020 8:19 am

Ralph Furley wrote:
Wed May 13, 2020 6:16 am
And, there is a reason those mailers ask, "Do you have over $500,000 or $1,000,000 in investable assets?" As a qualified or accredited investor, my home equity was NOT allowed in the calculations. There's a reason for that.
The reason in case of regulations making them focus on 'investable' assets is that you couldn't easily liquidate the house if you owed the provider more money. And the providers aren't interested in your home value anyway because isn't a profit opportunity for them if they deal in financial assets.

The 'investable assets' concept by brokers is a poor reason to exclude your homes value *and risk* from your financial calculations. Especially for people with recourse mortgages (standard in most states). People in high cost areas in recourse states with say $1mil houses and $1mil investment portfolio's are 50% one house, in one non-diversified area. When they say they are '100% stock' or '60/40' just based on the financial assets they are over or understating their risk by quite a lot. That's a fail safe in the first case (lots of people on this forum who say they are '100% stock' aren't remotely near it if you include all the stuff they are excluding: house, social security PV, 'emergency fund' etc), they aren't as reckless as they claim to be :happy . But house heavy people with theoretically conservative investment portfolio's are not being conservative to exclude their houses. Even if they *say* 'I think of my house as zero value' that's not likely to be their actual thinking if there's a big drop in local real estate values, again especially with a recourse mortgage and non home assets a lender could (non tax deferred generally) and would (significant) go after.

Of course if you are some combination of fortunate enough in accumulating wealth and/or happy with a cheap house, and it's a small % of your net worth and asset allocation, then it doesn't matter much how/if you consider it.
Last edited by JackoC on Wed May 13, 2020 8:30 am, edited 1 time in total.

KlangFool
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Re: Should you include home equity in Net Worth?

Post by KlangFool » Wed May 13, 2020 8:20 am

Balance1969 wrote:
Tue May 12, 2020 10:33 pm
KlangFool wrote:
Tue May 12, 2020 8:10 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
justsomeguy2018,

If you have to ask this question, you are buying too much house. You have a bigger problem than whether you should count home equity as part of your net worth.

KlangFool
There are a couple of possibilities why the OP is not buying too much resulting in a bigger problem.

One is based on a good friend of mine who is extremely risk adverse. He believes in paying off his house and investing in T-bills. He also makes a nice salary. Once he paid off his house, he was happy as a clam and really didn't seem to have big problems. Unless you believe it is a big problem to have a different belief in what one should do with their money than you.

Another is based on younger people who bought their first house half a decade ago and are still building up their portfolio. They might have $50k in their house and $50k in their 401(k) (ignore the actual numbers, you get the point).

I might have missed why they want to include their home in their net worth, but those two instances seem like legitimate reasons to think about including it in your net worth, not buying too much house, and not having a bigger problem.

I could be wrong.
Balance1969,

<<One is based on a good friend of mine who is extremely risk adverse. He believes in paying off his house and investing in T-bills. He also makes a nice salary. Once he paid off his house, he was happy as a clam and really didn't seem to have big problems. >>

Then, why would he care what the current market value of his house is? He is oblivious to his house price.

<<Another is based on younger people who bought their first house half a decade ago and are still building up their portfolio. They might have $50k in their house and $50k in their 401(k) (ignore the actual numbers, you get the point).>>

Aka, they are "House Poor". If they do not count the house, they have close to nothing. They bought too much house.

Except for accountants and financial people, normal people do not count and care about their house price unless they are "House Poor".

KlangFool

260chrisb
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Re: Should you include home equity in Net Worth?

Post by 260chrisb » Wed May 13, 2020 8:21 am

Sure why not but I don't know how useful knowing your net worth really is. I consider my house a great place to live in addition to it being a pretty good savings account without instant liquidity. Having a lot of equity in the home makes me feel good and with a mortgage balance that is a third of the way paid off and a third of its value it's considered as part of my net worth. Until it's paid off or sold only the down payment and the amount of principal payments are included in my net worth.

TN_Boy
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Re: Should you include home equity in Net Worth?

Post by TN_Boy » Wed May 13, 2020 8:23 am

KlangFool wrote:
Wed May 13, 2020 8:20 am
Balance1969 wrote:
Tue May 12, 2020 10:33 pm
KlangFool wrote:
Tue May 12, 2020 8:10 pm
justsomeguy2018 wrote:
Tue May 12, 2020 6:56 pm
Should home equity be included in your Net Worth? Also, how would you calculate it - the amount of principal paid down from your original loan, the amount owed vs. estimated value of house, the amount owed vs. estimated value of house net selling expenses....?
justsomeguy2018,

If you have to ask this question, you are buying too much house. You have a bigger problem than whether you should count home equity as part of your net worth.

KlangFool
There are a couple of possibilities why the OP is not buying too much resulting in a bigger problem.

One is based on a good friend of mine who is extremely risk adverse. He believes in paying off his house and investing in T-bills. He also makes a nice salary. Once he paid off his house, he was happy as a clam and really didn't seem to have big problems. Unless you believe it is a big problem to have a different belief in what one should do with their money than you.

Another is based on younger people who bought their first house half a decade ago and are still building up their portfolio. They might have $50k in their house and $50k in their 401(k) (ignore the actual numbers, you get the point).

I might have missed why they want to include their home in their net worth, but those two instances seem like legitimate reasons to think about including it in your net worth, not buying too much house, and not having a bigger problem.

I could be wrong.
Balance1969,

<<One is based on a good friend of mine who is extremely risk adverse. He believes in paying off his house and investing in T-bills. He also makes a nice salary. Once he paid off his house, he was happy as a clam and really didn't seem to have big problems. >>

Then, why would he care what the current market value of his house is? He is oblivious to his house price.

<<Another is based on younger people who bought their first house half a decade ago and are still building up their portfolio. They might have $50k in their house and $50k in their 401(k) (ignore the actual numbers, you get the point).>>

Aka, they are "House Poor". If they do not count the house, they have close to nothing. They bought too much house.

Except for accountants and financial people, normal people do not count and care about their house price unless they are "House Poor".

KlangFool
I am normal and I care about my house price. Your assertion that only people who are "house poor" care about such things is wrong. We are not house poor.

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