How Does Home Equity Fit in Your Net Worth?

Key Takeaways:

• You can calculate your net worth by subtracting your total liabilities from your assets. 
• Home equity represents the part of your home you own and is included in your net worth.
• There are various ways to access home equity, including a home equity loan, HELOC, and home equity agreement (HEA).

Tracking your net worth helps you understand your current financial situation and gives you a way to monitor your goals but figuring out what to include can be tricky. For example, you may be wondering whether you should include your home equity when calculating net worth. 

The short answer is yes, though it isn’t as easily accessible as other types of assets. Let’s look at the role home equity plays in your net worth and different ways you can turn it into usable cash.

What is net worth and why it matters

Your net worth compares the value of your assets to your total liabilities. A positive net worth means your assets are higher than your liabilities, while a negative net worth means your liabilities are greater than your assets.

Assets are anything you own of value, like cash, bank accounts, and investment accounts. In comparison, liabilities are anything you owe, like credit cards, loans, and other financial obligations. You can calculate your net worth using the following formula:

Your assets – your liabilities = your net worth

Your net worth matters because it provides a more comprehensive view into your financial health, beyond just your salary or bank account. Knowing this number can help you make more informed decisions and plan for the future.

Your net worth is constantly changing, so you’ll want to track this number over time to monitor your progress. This will help you understand how major milestones like getting married or buying a home affect your net worth. And watching your net worth grow over time can motivate you to stick to your financial goals.
 

Does net worth include home equity?

One aspect of net worth that can cause confusion is which assets should be included. Home equity is a good example of this — it represents the portion of your home that you own outright, and is often one of the most valuable assets a person has.

You can calculate your home equity by subtracting what you owe on your mortgage from the current market value of your home. For example, let’s say you owe $320,000 on your home, but the fair market value of your home is $450,000. That means you’re sitting on $130,000 in home equity.

That $130,000 represents real wealth, and it does count toward your net worth. In fact, many financial advisors consider home equity to be a key part of an individual’s overall financial picture. Lenders often look more favorably on borrowers with substantial home equity, which can open the door to better rates and terms on lending products.

While home equity isn’t as liquid as money sitting in a bank account, it’s still a valuable resource. Including home equity in your net worth gives you a clearer picture of your overall financial health.

What about liquid net worth?

Liquid net worth refers to the portion of your net worth that you can easily turn into cash, like money in a checking or savings account. Unlike liquid assets, home equity isn’t something you can instantly access. 

So even though it’s part of your overall net worth, it’s not usually counted toward your liquid net worth because you’d have to borrow against it or sell your home to access the funds. Fortunately, there are several different ways you can tap into your home equity and make it more accessible.
 

How to turn home equity into accessible wealth

If you’re looking for ways to access your home equity, here are some options to consider.

HELOC

A home equity line of credit (HELOC) operates like a credit card, so instead of receiving a large upfront payment, you’ll have access to a flexible line of credit. HELOCs are helpful if you need to fund a major expense, but aren’t entirely sure what the total cost will be. But they often come with adjustable interest rates, so your rate can increase or decrease depending on market conditions.

Home equity loan

A home equity loan is often referred to as a second mortgage. You’ll take out a loan using your home as collateral and will receive a one-time, lump-sum payment. Home equity loans come with fixed interest rates, so your monthly payments will stay the same. But you are at risk of losing your home if you default on the loan. 

Cash-out refinance

A cash-out refinance involves replacing your current mortgage with a new one at a higher amount. The new loan pays off your current mortgage, and you’ll receive the difference in cash. A cash-out refinance can be a good option, especially if you can secure lower interest rates than what you currently have. But you will have to pay closing costs, which are usually between 2% and 6% of the total loan amount.
 

Reverse mortgage

A reverse mortgage is available to borrowers age 62 or older. It lets you borrow money using your home as collateral, and the title stays in your name. But unlike a traditional mortgage, you won’t make monthly payments, and the loan is repaid once you’re no longer living in the home. 

But it’s not free money — interest and fees continue to accrue each month, and your balance grows over time. If you’re considering a reverse mortgage, the Federal Trade Commission (FTC) recommends asking for a “non-recourse” clause[1]  — this ensures you or your loved ones can’t owe more than the value of your home once you sell. 

HEA

A home equity agreement (HEA) lets you access a portion of your home’s value without taking out a loan, paying interest, or making monthly payments. You’ll receive a lump sum in cash in exchange for a share of your home’s future value, which is repaid when you sell the home or after a set term – typically 10 years. It’s a flexible way to turn illiquid equity into usable cash, while maintaining homeownership.

Conclusion

Your home equity is a valuable asset and part of your total net worth. Though it’s not a liquid asset, there are multiple ways you can access your equity and use it to expand your financial options. 

Unlock offers an HEA, which allows you to access a portion of your home value without taking out a loan or making monthly payments. However, it’s a good idea to compare multiple options to determine whether an HEA is right for you.
 

FAQs

Q. Does net worth include my home equity?

A. Yes, home equity is typically included in your net worth because it represents the portion of your home you own outright. 

Q. Is equity in your home an asset?
A. Yes, home equity is a type of asset. It reflects the part of the home that you own after subtracting your outstanding mortgage balance.

Q. How do I calculate my net worth with home equity?

A. Start by subtracting your mortgage balance from your home’s current market value to determine your home equity. From there, you can add that number to your other assets before subtracting your liabilities.

Q. Is home equity included in liquid net worth?

A. No, home equity isn’t usually included in liquid net worth because it can’t be quickly converted to cash. However, it can be made accessible through options like a HELOC or HEA.