Do I Have a Higher Net Worth If I Don't Have a Home Mortgage?

Owning a home can be your most valuable asset, but the mortgage you take out to secure it can be a liability.

One of the most important financial achievements a person can accomplish is creating a high net worth. Not having a home mortgage does not necessarily increase a person's net worth. High net worth has more to do with building wealth to high levels and avoiding taking on too many liabilities. Owning a home can boost a person’s net worth, but the accompanying mortgage could diminish it.

Net Worth

Net worth is defined as the value of everything you own minus everything you owe. The items you own are called assets. They can include real estate, investments in stocks and bonds and the cash you have on hand. The items you owe on are called liabilities, such as outstanding student loans and your mortgage. The higher your net worth, the more financial security you have, which can be very important. One of the areas where high net worth is important is retirement.

Home Ownership

Because net worth is based on assets and liabilities, it is imperative that you understand how home ownership can affect your net worth. Owning a home is one of the ways you can increase your net worth because it will likely be the most expensive asset you will have over your lifetime. However, there are different scenarios that play a role in determining if the mortgage is an asset or a liability. If you take out a mortgage on a house whose value is more than you can afford, you could be creating a liability. The same is true if you take out the largest mortgage for which you can qualify. This can leave you with no room for error if your income decreases and you cannot make your mortgage payments.

Asset or Liability

You are taking on an extreme amount of debt when you take out a mortgage to buy a home; however by doing so, you are also building equity in your most valuable asset. By taking on this debt, you are taking on a liability and it will remain a liability as long as you are paying on the mortgage. A rule of thumb in determining if something is an asset or liability is to remember that anything you can quickly turn into cash is an asset.

Increasing Net Worth

Building up your savings is an important step in increasing your net worth. You should also try to pay off your debts as quickly as possible, especially your long-term debts, such as mortgages. The goal should be to owe as little as possible, while accumulating as many assets as possible.

References

• Bankrate.com: Three Steps To Boost Your Net Worth; Marcie Geffner; July 12, 2010
• Business Dictionary: What is Asset? Definition and Meaning
• The Nest: Is Your Mortgage An Asset?

Resources

• Bankrate.com: Net Worth Calculator