Should you include home equity in Net Worth?

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

Post by JoeRetire »

rbaldini wrote: Wed May 13, 2020 8:57 am I am always mystified by folks who say “who cares about net worth?” The sum total of all the things you own is a useful number, especially if you intend to sell them one day.
I've never found a use for it.
Even if you don’t intend to sell your house, unforeseen events might force your hand. If that happens, you’d like to make as much as possible from it.
Of course.

But if unforeseen events force your hand, you'll have to take whatever you can get at that point in time. And that has nothing to do with net worth.
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vipertom1970
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Re: Should you include home equity in Net Worth?

Post by vipertom1970 »

I count my cars, boat, jewelry, watches and my house as part of my NW but never part of my investment AA.
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willthrill81
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Re: Should you include home equity in Net Worth?

Post by willthrill81 »

In these threads, there are two important points that get conflated often.

1. Should you include home equity in a calculation of your net worth?

Yes, of course. Your net worth is all of your assets minus all of your liabilities.

2. Is your net worth a meaningful number?

Maybe. It depends on many factors.
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Re: Should you include home equity in Net Worth?

Post by Grt2bOutdoors »

I use it as part of networth calculation, but only after giving a good "haircut" to the value to account for market swings, selling costs, etc and for purposes of obtaining a loan. Your equity could be 100% as in no existing mortgage on the home, but no bank will lend you 100% of the value of the home. They may extend 70% or 80%, but that's it. So figure 70% of your total equity can be borrowed against.

For asset allocation purposes, I don't include home equity.
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Re: Should you include home equity in Net Worth?

Post by willthrill81 »

Those who say that their home is not part of their net worth are welcome to deed their worthless home to me. :D
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fortfun
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Re: Should you include home equity in Net Worth?

Post by fortfun »

If you are willing to sell your home at retirement, why not?
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Re: Should you include home equity in Net Worth?

Post by smitcat »

KlangFool wrote: Wed May 13, 2020 11:59 am
smitcat wrote: Wed May 13, 2020 11:54 am
KlangFool wrote: Wed May 13, 2020 11:43 am
Kenkat wrote: Wed May 13, 2020 10:40 am

Where does that 10% number come from besides just some arbitrary number used to prove your definition of “house poor”.

Someone who lives in a $300,001 house and who has a net worth of $3,000,000 is not “house poor” according to most people. They will most likely make their heirs very happy.
Kenkat,

Most people are not doing well financially. So, the opinion of most people is not a good way to judge any idea.

KlangFool

In your opinion is someone who lives in a $300,001 home with a net worth of $3,000,000 house poor or not?
smitcat,

1) Please note that my statement is less than 10%. So, it is not an exact number.

2) In my opinion, if the house value is large enough to be counted, the person is "house poor". In this case, the person is "house poor".

KlangFool

"1) Please note that my statement is less than 10%. So, it is not an exact number."
Interesting - so if your own townhome was paid off you would consider yourself "house poor".
rkhusky
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Re: Should you include home equity in Net Worth?

Post by rkhusky »

I keep track of net worth, which includes investments, house, cars, and college fund. I also track portfolio value, which is just retirement investments.

When I make a mortgage payment, interest is an expense and principal is a transfer from checking to house equity.
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vineviz
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Re: Should you include home equity in Net Worth?

Post by vineviz »

willthrill81 wrote: Wed May 13, 2020 4:46 pm In these threads, there are two important points that get conflated often.

1. Should you include home equity in a calculation of your net worth?

Yes, of course. Your net worth is all of your assets minus all of your liabilities.

2. Is your net worth a meaningful number?

Maybe. It depends on many factors.
My view is that net worth is a meaningful longitudinal measure of household financial health: net worth should, over time, be persistently increasing for well-functioning working households.

If it’s not, it should be a red flag to folks that something is likely out of whack. Sometimes a drop in net worth is unavoidable and sometimes it might even be useful, but the trend is a valuable signal.

Comparisons between households, on the other hand, don’t generally strike me as particularly useful.
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Re: Should you include home equity in Net Worth?

Post by rbaldini »

willthrill81 wrote: Wed May 13, 2020 4:56 pm Those who say that their home is not part of their net worth are welcome to deed their worthless home to me. :D
+1. I'll even let you rent it for the same price as your current mortgage! That's all that matters, right?
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Re: Should you include home equity in Net Worth?

Post by willthrill81 »

vineviz wrote: Wed May 13, 2020 5:29 pm
willthrill81 wrote: Wed May 13, 2020 4:46 pm In these threads, there are two important points that get conflated often.

1. Should you include home equity in a calculation of your net worth?

Yes, of course. Your net worth is all of your assets minus all of your liabilities.

2. Is your net worth a meaningful number?

Maybe. It depends on many factors.
My view is that net worth is a meaningful longitudinal measure of household financial health: net worth should, over time, be persistently increasing for well-functioning working households.

If it’s not, it should be a red flag to folks that something is likely out of whack. Sometimes a drop in net worth is unavoidable and sometimes it might even be useful, but the trend is a valuable signal.

Comparisons between households, on the other hand, don’t generally strike me as particularly useful.
I agree.
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Re: Should you include home equity in Net Worth?

Post by smitcat »

vipertom1970 wrote: Wed May 13, 2020 4:24 pm I count my cars, boat, jewelry, watches and my house as part of my NW but never part of my investment AA.
+1
rbaldini
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Re: Should you include home equity in Net Worth?

Post by rbaldini »

JoeRetire wrote: Wed May 13, 2020 4:22 pm But if unforeseen events force your hand, you'll have to take whatever you can get at that point in time. And that has nothing to do with net worth.
Come on man. The amount of cash I can access in hard times has "nothing" to do with my net worth? Be serious.

There are a surprising number of people who claim that net worth is a useless or meaningless number. But I guarantee everyone who said this would really love to have more of it.
Last edited by rbaldini on Wed May 13, 2020 5:44 pm, edited 1 time in total.
KlangFool
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

smitcat wrote: Wed May 13, 2020 5:06 pm
KlangFool wrote: Wed May 13, 2020 11:59 am
smitcat wrote: Wed May 13, 2020 11:54 am
KlangFool wrote: Wed May 13, 2020 11:43 am
Kenkat wrote: Wed May 13, 2020 10:40 am

Where does that 10% number come from besides just some arbitrary number used to prove your definition of “house poor”.

Someone who lives in a $300,001 house and who has a net worth of $3,000,000 is not “house poor” according to most people. They will most likely make their heirs very happy.
Kenkat,

Most people are not doing well financially. So, the opinion of most people is not a good way to judge any idea.

KlangFool

In your opinion is someone who lives in a $300,001 home with a net worth of $3,000,000 house poor or not?
smitcat,

1) Please note that my statement is less than 10%. So, it is not an exact number.

2) In my opinion, if the house value is large enough to be counted, the person is "house poor". In this case, the person is "house poor".

KlangFool

"1) Please note that my statement is less than 10%. So, it is not an exact number."
Interesting - so if your own townhome was paid off you would consider yourself "house poor".
smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

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

Post by LadyGeek »

The points regarding "house poor" have been made. Let's move on.

Please stay on-topic, which is:
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....?
This thread is now in the Personal Finance (Not Investing) forum (net worth).
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Re: Should you include home equity in Net Worth?

Post by Grt2bOutdoors »

willthrill81 wrote: Wed May 13, 2020 4:56 pm Those who say that their home is not part of their net worth are welcome to deed their worthless home to me. :D
Deeded with the caveat that I am granted a life estate!
What's your address? I'll send you my tax bill, you may change your mind! :twisted:
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Re: Should you include home equity in Net Worth?

Post by zeal »

I include Zillow "zestimate" as an asset and mortgage balance as a liability in our net worth calculation. We love this house and hope to stay here forever--no plans to sell. I keep track of net worth simply to keep track of it... I like to plot it on a two-line line graph: actual vs. projected.
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Re: Should you include home equity in Net Worth?

Post by smitcat »

KlangFool wrote: Wed May 13, 2020 5:43 pm
smitcat wrote: Wed May 13, 2020 5:06 pm
KlangFool wrote: Wed May 13, 2020 11:59 am
smitcat wrote: Wed May 13, 2020 11:54 am
KlangFool wrote: Wed May 13, 2020 11:43 am

Kenkat,

Most people are not doing well financially. So, the opinion of most people is not a good way to judge any idea.

KlangFool

In your opinion is someone who lives in a $300,001 home with a net worth of $3,000,000 house poor or not?
smitcat,

1) Please note that my statement is less than 10%. So, it is not an exact number.

2) In my opinion, if the house value is large enough to be counted, the person is "house poor". In this case, the person is "house poor".

KlangFool

"1) Please note that my statement is less than 10%. So, it is not an exact number."
Interesting - so if your own townhome was paid off you would consider yourself "house poor".
smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

KlangFool
"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
KlangFool
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

smitcat wrote: Thu May 14, 2020 7:19 am
KlangFool wrote: Wed May 13, 2020 5:43 pm
smitcat wrote: Wed May 13, 2020 5:06 pm
KlangFool wrote: Wed May 13, 2020 11:59 am
smitcat wrote: Wed May 13, 2020 11:54 am


In your opinion is someone who lives in a $300,001 home with a net worth of $3,000,000 house poor or not?
smitcat,

1) Please note that my statement is less than 10%. So, it is not an exact number.

2) In my opinion, if the house value is large enough to be counted, the person is "house poor". In this case, the person is "house poor".

KlangFool

"1) Please note that my statement is less than 10%. So, it is not an exact number."
Interesting - so if your own townhome was paid off you would consider yourself "house poor".
smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

KlangFool
"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

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

Post by smitcat »

KlangFool wrote: Thu May 14, 2020 7:26 am
smitcat wrote: Thu May 14, 2020 7:19 am
KlangFool wrote: Wed May 13, 2020 5:43 pm
smitcat wrote: Wed May 13, 2020 5:06 pm
KlangFool wrote: Wed May 13, 2020 11:59 am

smitcat,

1) Please note that my statement is less than 10%. So, it is not an exact number.

2) In my opinion, if the house value is large enough to be counted, the person is "house poor". In this case, the person is "house poor".

KlangFool

"1) Please note that my statement is less than 10%. So, it is not an exact number."
Interesting - so if your own townhome was paid off you would consider yourself "house poor".
smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

KlangFool
"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

KlangFool
Easy - I am not in accounting or finance and we track everything in quickbooks for many years now. Net worth has been useful many times over the years.
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Re: Should you include home equity in Net Worth?

Post by abner kravitz »

Nate79 wrote: Wed May 13, 2020 3:08 pm How many "net worth" and "do I include home equity in net worth" threads do we need? One per month?
Seems about right. And yet I went through it. Kinda like seeing a car wreck on the highway, hard to look away...
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

smitcat wrote: Thu May 14, 2020 7:44 am
KlangFool wrote: Thu May 14, 2020 7:26 am
smitcat wrote: Thu May 14, 2020 7:19 am
KlangFool wrote: Wed May 13, 2020 5:43 pm
smitcat wrote: Wed May 13, 2020 5:06 pm


"1) Please note that my statement is less than 10%. So, it is not an exact number."
Interesting - so if your own townhome was paid off you would consider yourself "house poor".
smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

KlangFool
"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

KlangFool
Easy - I am not in accounting or finance and we track everything in quickbooks for many years now. Net worth has been useful many times over the years.
Is your home equitye less than 10% of your net worth?

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

Post by Sandtrap »

Net worth includes everything, including residence, minus liabilities.
Ballpark mental math estimates are enough and keeps things simple.

What generates a net income stream is my primary concern and what I focus on. That includes R/E other than my home.

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

Post by smitcat »

KlangFool wrote: Thu May 14, 2020 7:47 am
smitcat wrote: Thu May 14, 2020 7:44 am
KlangFool wrote: Thu May 14, 2020 7:26 am
smitcat wrote: Thu May 14, 2020 7:19 am
KlangFool wrote: Wed May 13, 2020 5:43 pm

smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

KlangFool
"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

KlangFool
Easy - I am not in accounting or finance and we track everything in quickbooks for many years now. Net worth has been useful many times over the years.
Is your home equitye less than 10% of your net worth?

KlangFool
According to your clarified rules in this post:
- if you track or need to know your 'net worth' you are house poor
- if your home is 10% or more of your net worth you are house poor
- it is not relevant to listen to others as most are not in good shape financially
- if your home is worth $300,001 and your net worth is $3,000,000 you are house poor
- if your home is more than 10% of your net worth but your position is that you "do not care" the rule is rescinded
- although we(I) know very little about the OP or why he is asking you state that you know he is house poor

Klang Fool's home is worth well more than 10% of net worth, your rule is violated per your definition. But....since you do not care about the value the rule is rescinded. What else do we need to clarify?
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Re: Should you include home equity in Net Worth?

Post by Sandtrap »

Net worth includes everything, including residence, minus liabilities.
Ballpark mental math estimates are enough and keeps things simple.

What generates a net income stream is my primary concern and what I focus on. That includes R/E other than my home.

Many in UHCOL Hawaii are very “House Poor” owning comparatively simple homes valued between 1-4 Million but “getting by”. Home value as an implied reflection of Net Worth / Wealth level is a common topic for conversational .....subject.....

Net worth is only an interesting passing topic rarely mentioned between DW and I in retirement.

j🌺
Last edited by Sandtrap on Thu May 14, 2020 8:16 am, edited 2 times in total.
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Redlion
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Re: Should you include home equity in Net Worth?

Post by Redlion »

What if you have a 2 million house in California and make minimum wage and have no retirement assets. I believe this is common if the home was purchased decades ago.
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Harry Livermore
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Re: Should you include home equity in Net Worth?

Post by Harry Livermore »

Grt2bOutdoors wrote: Wed May 13, 2020 4:53 pm I use it as part of networth calculation, but only after giving a good "haircut" to the value to account for market swings, selling costs, etc and for purposes of obtaining a loan. Your equity could be 100% as in no existing mortgage on the home, but no bank will lend you 100% of the value of the home. They may extend 70% or 80%, but that's it. So figure 70% of your total equity can be borrowed against.

For asset allocation purposes, I don't include home equity.
I also discount my real estate a little for market swings and selling costs, but only 10%. I also rarely update values (unlike my investment portfolio prices) and find online tools like Zillow to be a little all over the map.
I discount my business equipment by 50%.
Neither of those are counted for retirement purposes. But I do put in a number for rental income on the 2 rental properties.
I count them in my "big picture" asset allocation. But again, I have my spreadsheet set up to take in several views, 20,000 feet, 1,500 feet, and ground level :D
Cheers
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Re: Should you include home equity in Net Worth?

Post by Harry Livermore »

vineviz wrote: Wed May 13, 2020 5:29 pm
My view is that net worth is a meaningful longitudinal measure of household financial health: net worth should, over time, be persistently increasing for well-functioning working households.

If it’s not, it should be a red flag to folks that something is likely out of whack. Sometimes a drop in net worth is unavoidable and sometimes it might even be useful, but the trend is a valuable signal.
Agree. It's a useful metric. I also have a "equity to debt" ratio, and a "percentage of net worth" debt line. I want to see those numbers increasing and decreasing, respectively.
Cheers
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

smitcat wrote: Thu May 14, 2020 8:06 am
KlangFool wrote: Thu May 14, 2020 7:47 am
smitcat wrote: Thu May 14, 2020 7:44 am
KlangFool wrote: Thu May 14, 2020 7:26 am
smitcat wrote: Thu May 14, 2020 7:19 am

"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

KlangFool
Easy - I am not in accounting or finance and we track everything in quickbooks for many years now. Net worth has been useful many times over the years.
Is your home equitye less than 10% of your net worth?

KlangFool
According to your clarified rules in this post:
- if you track or need to know your 'net worth' you are house poor
- if your home is 10% or more of your net worth you are house poor
- it is not relevant to listen to others as most are not in good shape financially
- if your home is worth $300,001 and your net worth is $3,000,000 you are house poor
- if your home is more than 10% of your net worth but your position is that you "do not care" the rule is rescinded
- although we(I) know very little about the OP or why he is asking you state that you know he is house poor

Klang Fool's home is worth well more than 10% of net worth, your rule is violated per your definition. But....since you do not care about the value the rule is rescinded. What else do we need to clarify?
smitcat,

One correction. You missed one word.

<<if your home equity is 10% or more of your net worth you are house poor>>

<<Klang Fool's home is worth well more than 10% of net worth,>>

My home equity is not more than 10% of net worth.

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

Post by enclee »

I like to include Home Value minus 10% to account for fees and negotiating. I view Net Worth the same as I view checking my weight on a scale. It's a decent health indicator.
smitcat
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Re: Should you include home equity in Net Worth?

Post by smitcat »

KlangFool wrote: Thu May 14, 2020 8:32 am
smitcat wrote: Thu May 14, 2020 8:06 am
KlangFool wrote: Thu May 14, 2020 7:47 am
smitcat wrote: Thu May 14, 2020 7:44 am
KlangFool wrote: Thu May 14, 2020 7:26 am

Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

KlangFool
Easy - I am not in accounting or finance and we track everything in quickbooks for many years now. Net worth has been useful many times over the years.
Is your home equitye less than 10% of your net worth?

KlangFool
According to your clarified rules in this post:
- if you track or need to know your 'net worth' you are house poor
- if your home is 10% or more of your net worth you are house poor
- it is not relevant to listen to others as most are not in good shape financially
- if your home is worth $300,001 and your net worth is $3,000,000 you are house poor
- if your home is more than 10% of your net worth but your position is that you "do not care" the rule is rescinded
- although we(I) know very little about the OP or why he is asking you state that you know he is house poor

Klang Fool's home is worth well more than 10% of net worth, your rule is violated per your definition. But....since you do not care about the value the rule is rescinded. What else do we need to clarify?
smitcat,

One correction. You missed one word.

<<if your home equity is 10% or more of your net worth you are house poor>>

<<Klang Fool's home is worth well more than 10% of net worth,>>

My home equity is not more than 10% of net worth.

KlangFool
"My home equity is not more than 10% of net worth."
Yes - of course. As long as you do not pay off your mortgage then your equity is lower.
I gather when you retire shortly you will continue to carry a mortgage then which will save you from being house poor per your definition.
The 'rule' would obviously favor a larger mortgage and carrying it forever.
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

smitcat wrote: Thu May 14, 2020 10:31 am
The 'rule' would obviously favor a larger mortgage and carrying it forever.
smitcat,

1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge. Emotionally, it might feel great, Financially, it is a lousy deal.

2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it.

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

Post by EnjoyIt »

KlangFool wrote: Thu May 14, 2020 7:47 am
smitcat wrote: Thu May 14, 2020 7:44 am
KlangFool wrote: Thu May 14, 2020 7:26 am
smitcat wrote: Thu May 14, 2020 7:19 am
KlangFool wrote: Wed May 13, 2020 5:43 pm

smitcat,

No. If I pay off the townhouse, it is because my net worth excluding the house is so large that I do not care or need to count the value of the house.

It is very simple.

If the house's value matter to you, you had bought too much house.

KlangFool
"It is very simple."
- there are plenty of people that have more than 10% in home value and do not care that much
- there are plenty of people who need to know net worth and do not have 10% in home value
Show me.

In almost every case that we come across someone count the house, their home equity is more than 10%. The exception is accountant and finance professional.

KlangFool
Easy - I am not in accounting or finance and we track everything in quickbooks for many years now. Net worth has been useful many times over the years.
Is your home equitye less than 10% of your net worth?

KlangFool
My current home equity to net worth is right about 10% because of the mortgage. I count my home in my net worth because in the next few years I expect to sell this house and buy a more expensive home that will require significantly less property tax and lower upkeep costs. If I was not expecting to sell in the next few years I would not have even bothered to look at what the house is worth.

If bond rates continue to decline, there is a very good chance I will be selling a portion of my bonds and paying off my mortgage. At that point I will be about 16% home equity to wealth.
KlangFool wrote: Thu May 14, 2020 10:40 am ...
1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge. Emotionally, it might feel great, Financially, it is a lousy deal.
...
My mortgage rate is 2.75% and I do not itemize. My mortgage is about 20% of my bond portfolio. Considering how small the change would be to my AA, I do not see it as a big deal and likely a positive move. Future contributions will likely go towards bonds.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: Should you include home equity in Net Worth?

Post by smitcat »

KlangFool wrote: Thu May 14, 2020 10:40 am
smitcat wrote: Thu May 14, 2020 10:31 am
The 'rule' would obviously favor a larger mortgage and carrying it forever.
smitcat,

1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge. Emotionally, it might feel great, Financially, it is a lousy deal.

2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it.

KlangFool

"1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss
- you do not know what future inflation rates may be so if the mortgage is a higher rate than inflation now it is a good choice to remove it

"2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it."
Your rule makes sense until you make exceptions that are fully subjective.
I am not pointing out that I do not like your rule... I am pointing out that it is internally inconsistent and has no value as stated.
acegolfer
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Re: Should you include home equity in Net Worth?

Post by acegolfer »

Harry Livermore wrote: Thu May 14, 2020 8:15 am
vineviz wrote: Wed May 13, 2020 5:29 pm
My view is that net worth is a meaningful longitudinal measure of household financial health: net worth should, over time, be persistently increasing for well-functioning working households.

If it’s not, it should be a red flag to folks that something is likely out of whack. Sometimes a drop in net worth is unavoidable and sometimes it might even be useful, but the trend is a valuable signal.
Agree. It's a useful metric. I also have a "equity to debt" ratio, and a "percentage of net worth" debt line. I want to see those numbers increasing and decreasing, respectively.
Cheers
Correct. All these metrics including NWT are meaningful to those who know how to properly use them. If anyone claims NWT is meaningless, he's doing a disservice to the community.
alfaspider
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Re: Should you include home equity in Net Worth?

Post by alfaspider »

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
There's a difference between your home and a single REIT. You have to live somewhere. Whether you've borrowed or paid cash, you are still exposed to the housing value when you buy a house. By contrast, you don't have to invest in a particular REIT or any REIT at all.

The only way to avoid the economic exposure of the single property is to rent. But there are valid non-financial reasons why someone might not want to rent (different housing stock, potential for being forced to move, inability to control growth in housing expense).

Of course a house is part of your net worth. It is an asset you can tap if needed. If we suffered complete income loss and couldn't afford the house, we could buy a cheaper house with cash further from town with the proceeds of the sale. The question is what you do with that information. Don't make the mistake of buying more house that you would ordinarily do just for the "investment potential." As an investment, you will be lucky to match inflation after selling fees are taken into account.
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Re: Should you include home equity in Net Worth?

Post by willthrill81 »

KlangFool wrote: Thu May 14, 2020 10:40 am 1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge. Emotionally, it might feel great, Financially, it is a lousy deal.
1. You do not know what the "future annual inflation rate" will be.

2. Do you own no bonds paying lower than what you estimate the future annual inflation rate to be? I strongly suspect that you do.

3. Mortgage interest rates are often significantly higher than the yield on bonds. Therefore, it can make great financial sense to pay off one's mortgage, as long as the individual still has adequate liquidity.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

willthrill81 wrote: Thu May 14, 2020 11:02 am
KlangFool wrote: Thu May 14, 2020 10:40 am 1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge. Emotionally, it might feel great, Financially, it is a lousy deal.
1. You do not know what the "future annual inflation rate" will be.

2. Do you own no bonds paying lower than what you estimate the future annual inflation rate to be? I strongly suspect that you do.

3. Mortgage interest rates are often significantly higher than the yield on bonds. Therefore, it can make great financial sense to pay off one's mortgage, as long as the individual still has adequate liquidity.
willthrill81,

You believe that Mortgage = negative bond. I don't. Hence, I do not compare mortgage interest rate with my bond. I compared the mortgage interest rate with my 60/40 portfolio return.

<<1. You do not know what the "future annual inflation rate" will be.>>

Do you believe that the average inflation rate over the next 20 years would be less than 4%? I don't. With every additional trillion printed every week, the likelihood of that to be true is unlikely.

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

Post by KlangFool »

smitcat wrote: Thu May 14, 2020 10:51 am


"1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss
- you do not know what future inflation rates may be so if the mortgage is a higher rate than inflation now it is a good choice to remove it

"2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it."
Your rule makes sense until you make exceptions that are fully subjective.
I am not pointing out that I do not like your rule... I am pointing out that it is internally inconsistent and has no value as stated.
smitcat,

<<1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss>>

That applies to you because of your excellent pension income. It does not apply to me. And, I plan to early retire.

KlangFool
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willthrill81
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Re: Should you include home equity in Net Worth?

Post by willthrill81 »

KlangFool wrote: Thu May 14, 2020 11:33 am
willthrill81 wrote: Thu May 14, 2020 11:02 am
KlangFool wrote: Thu May 14, 2020 10:40 am 1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge. Emotionally, it might feel great, Financially, it is a lousy deal.
1. You do not know what the "future annual inflation rate" will be.

2. Do you own no bonds paying lower than what you estimate the future annual inflation rate to be? I strongly suspect that you do.

3. Mortgage interest rates are often significantly higher than the yield on bonds. Therefore, it can make great financial sense to pay off one's mortgage, as long as the individual still has adequate liquidity.
willthrill81,

You believe that Mortgage = negative bond. I don't. Hence, I do not compare mortgage interest rate with my bond. I compared the mortgage interest rate with my 60/40 portfolio return.

<<1. You do not know what the "future annual inflation rate" will be.>>

Do you believe that the average inflation rate over the next 20 years would be less than 4%? I don't. With every additional trillion printed every week, the likelihood of that to be true is unlikely.

KlangFool
So 40% of your portfolio is in an asset that is paying less than your mortgage interest rate and what you expect inflation to be. That's inconsistent with your above rules.

It's a "lousy deal," as you put it, to get a 1.5% return on 40% of your portfolio when you're borrowing money at more than 3%.

If you're really looking for an inflation hedge, then you should own a lot of TIPS/I-bonds. That would be far less costly than carrying a mortgage.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Should you include home equity in Net Worth?

Post by snackdog »

Net worth should be all the cash you could muster in, say, six months to pay off a kidnapper. House counts.
KlangFool
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

willthrill81 wrote: Thu May 14, 2020 11:37 am
So 40% of your portfolio is in an asset that is paying less than your mortgage interest rate and what you expect inflation to be. That's inconsistent with your above rules.

It's a "lousy deal," as you put it, to get a 1.5% return on 40% of your portfolio when you're borrowing money at more than 3%.

If you're really looking for an inflation hedge, then you should own a lot of TIPS/I-bonds. That would be far less costly than carrying a mortgage.
willthrill81,

1) You are confusing bond yield with bond total return. For example, the YTD return of VBTLX is 5% while the yield is 2.56%.

<<It's a "lousy deal," as you put it, to get a 1.5% return on 40% of your portfolio when you're borrowing money at more than 3%.>>

2) You choose to borrow at 3% and invest in the bond. So, it is a lousy deal to you.

3) I choose to borrow at 3% and invest in my 60/40 portfolio. So, it is a good deal for me. Are you claiming that the 60/40 return less than 3% per year?

Just because it is a "lousy deal" to you, it does not make it a bad deal for me.

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

Post by TN_Boy »

KlangFool wrote: Thu May 14, 2020 11:36 am
smitcat wrote: Thu May 14, 2020 10:51 am


"1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss
- you do not know what future inflation rates may be so if the mortgage is a higher rate than inflation now it is a good choice to remove it

"2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it."
Your rule makes sense until you make exceptions that are fully subjective.
I am not pointing out that I do not like your rule... I am pointing out that it is internally inconsistent and has no value as stated.
smitcat,

<<1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss>>

That applies to you because of your excellent pension income. It does not apply to me. And, I plan to early retire.

KlangFool
Having to draw from the portfolio to pay a mortgage can definitely affect your tax rate and also the room available for roth conversions.

But I also don't think that we are about to live in inflationary times.
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Re: Should you include home equity in Net Worth?

Post by willthrill81 »

KlangFool wrote: Thu May 14, 2020 11:45 am
willthrill81 wrote: Thu May 14, 2020 11:37 am
So 40% of your portfolio is in an asset that is paying less than your mortgage interest rate and what you expect inflation to be. That's inconsistent with your above rules.

It's a "lousy deal," as you put it, to get a 1.5% return on 40% of your portfolio when you're borrowing money at more than 3%.

If you're really looking for an inflation hedge, then you should own a lot of TIPS/I-bonds. That would be far less costly than carrying a mortgage.
willthrill81,

1) You are confusing bond yield with bond total return. For example, the YTD return of VBTLX is 5% while the yield is 2.56%.

<<It's a "lousy deal," as you put it, to get a 1.5% return on 40% of your portfolio when you're borrowing money at more than 3%.>>

2) You choose to borrow at 3% and invest in the bond. So, it is a lousy deal to you.

3) I choose to borrow at 3% and invest in my 60/40 portfolio. So, it is a good deal for me. Are you claiming that the 60/40 return less than 3% per year?

Just because it is a "lousy deal" to you, it does not make it a bad deal for me.

KlangFool
1. Look again. The SEC yield on VBTLX is 1.51% right now. That's the expected return of this fund over the next decade, not remotely 5%. You cannot buy the past.

2. I don't make that choice; you are by carrying a mortgage while buying bonds.

3. I don't care about the returns of a 60/40 portfolio. I'm focused in the bonds you're buying that are now paying 1.51%, which is also their expected return for the next decade, while you're borrowing at a cost of over 3%. If you were doing that to in order to buy liquidity, that's fine, but it's still a decision with a negative expected return.

I'm not going to continue this conversation with you because you're clearly playing weird mental games to convince yourself that a mortgage is somehow a good deal.

I for one don't think that borrowing money at 3.5% only to then loan it back out at 1.5% is a good deal. Now if you borrow that money only to buy stocks, that's a different matter, but you clearly aren't.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Harry Livermore
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Re: Should you include home equity in Net Worth?

Post by Harry Livermore »

snackdog wrote: Thu May 14, 2020 11:44 am Net worth should be all the cash you could muster in, say, six months to pay off a kidnapper. House counts.
Hahahaha. Pretty dark. But true!
Cheers
KlangFool
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Re: Should you include home equity in Net Worth?

Post by KlangFool »

TN_Boy wrote: Thu May 14, 2020 11:46 am
KlangFool wrote: Thu May 14, 2020 11:36 am
smitcat wrote: Thu May 14, 2020 10:51 am


"1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss
- you do not know what future inflation rates may be so if the mortgage is a higher rate than inflation now it is a good choice to remove it

"2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it."
Your rule makes sense until you make exceptions that are fully subjective.
I am not pointing out that I do not like your rule... I am pointing out that it is internally inconsistent and has no value as stated.
smitcat,

<<1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss>>

That applies to you because of your excellent pension income. It does not apply to me. And, I plan to early retire.

KlangFool
Having to draw from the portfolio to pay a mortgage can definitely affect your tax rate and also the room available for roth conversions.

But I also don't think that we are about to live in inflationary times.
TN_Boy,

<<Having to draw from the portfolio to pay a mortgage can definitely affect your tax rate and also the room available for roth conversions. >>

1) If the effect is close to zero, does it matters? If you throw a party and nobody shows up, is it still a party?

2) Not if your mortgage is significantly small.

<<But I also don't think that we are about to live in inflationary times.>>

Good luck! I am buying more Gold and Silver.

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

Post by KlangFool »

willthrill81 wrote: Thu May 14, 2020 11:52 am
I for one don't think that borrowing money at 3.5% only to then loan it back out at 1.5% is a good deal. Now if you borrow that money only to buy stocks, that's a different matter, but you clearly aren't.
willthrill81,

If you believe that I can borrow money to buy bond (0/100) or stock (100/0), why is it not possible for me to borrow at 3.5% and investing in a 60/40 portfolio? Aren't you weird?

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

Post by DetroitRick »

OP as you can see, this topic attracts a lot of passion. My advice - track whatever elements of net worth influence your decisions. It varies from person to person. The trick may involve knowing your own needs for future decisions. For most of us (okay, at least for me), assets like cash accounts and investment accounts get used a lot in our planning. Same with debt balances. So, I track them. Property of various types - it just depends.

I've tracked home equity (market value less mortgage balance) during times when it mattered. For me, those times included near-term upsizing or downsizing plans, as well as mortgage refinancing. When the need went away, I simply ended my tracking. Right now, I track mortgage balance only. Technically correct? NO. But who cares? If you need to present personal financial statements for any reason, now or future, then I would care. If you find tracking it motivational, then do it (I did when I bought my first house). But I won't forget I own a home just because the value is missing from my (Quicken) net worth statement.

Same with automobile value. I always track any existing loans, but not the asset value itself - except when (once, in a very rare circumstance) I am considering only holding the car for a short time and the value impacts my sell/buy decision.

Other personal property, which for me is significant, I don't bother with accounting for that either. I've got better things to do, and I wouldn't use the info in any possible way. I have, on rare occasion, done a cursory tally to assess insurance adequacy though.

It's all about your needs, not generally accepted accounting principles. Nobody except a lender has ever asked me for my net worth, and nobody but a lender would ever do it more than once. Now, off to inventory my closet....
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Re: Should you include home equity in Net Worth?

Post by smitcat »

KlangFool wrote: Thu May 14, 2020 11:36 am
smitcat wrote: Thu May 14, 2020 10:51 am


"1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss
- you do not know what future inflation rates may be so if the mortgage is a higher rate than inflation now it is a good choice to remove it

"2) This is my rule. Anyone can choose to like it, hate it, or ignore it totally. If it does not make sense for you, don't worry about it."
Your rule makes sense until you make exceptions that are fully subjective.
I am not pointing out that I do not like your rule... I am pointing out that it is internally inconsistent and has no value as stated.
smitcat,

<<1) Why would anyone pay down or pay off a mortgage with an interest rate lower than the future annual inflation rate? It is a great inflation hedge."
- the extra draw in retirement to pay the mortgage would raise taxes where the mortgage vs inflation was a combined loss>>

That applies to you because of your excellent pension income. It does not apply to me. And, I plan to early retire.

KlangFool
"That applies to you because of your excellent pension income. It does not apply to me. And, I plan to early retire."
I hope it would apply to many folks that have decently saved and planned over the years... especially on this site.
I do not know where you get your information nor why this would get personal but please note:
- we have zero pensions
- we are already retired ,and early
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Re: Should you include home equity in Net Worth?

Post by enclee »

KlangFool wrote: Wed May 13, 2020 11:59 am
smitcat wrote: Wed May 13, 2020 11:54 am
KlangFool wrote: Wed May 13, 2020 11:43 am
Kenkat wrote: Wed May 13, 2020 10:40 am

Where does that 10% number come from besides just some arbitrary number used to prove your definition of “house poor”.

Someone who lives in a $300,001 house and who has a net worth of $3,000,000 is not “house poor” according to most people. They will most likely make their heirs very happy.
Kenkat,

Most people are not doing well financially. So, the opinion of most people is not a good way to judge any idea.

KlangFool

In your opinion is someone who lives in a $300,001 home with a net worth of $3,000,000 house poor or not?
smitcat,

1) Please note that my statement is less than 10%. So, it is not an exact number.

2) In my opinion, if the house value is large enough to be counted, the person is "house poor". In this case, the person is "house poor".

KlangFool
You're not using the term "house poor" in its proper context.
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