Your home may be your largest asset, but should you include it in your net worth calculations? In some situations, it’s a good idea, and in others, not so much.
Some say you should list all assets as part of your net worth, including your home. Others contend that you have to live somewhere, and any money you have tied up in your home is essentially earmarked for that purpose.
Generally, though, when using tools to tap your home equity, you may want to include your house as part of your net worth. But when calculating retirement savings, it’s a no-go.
Recommended: Does Net Worth Include Home Equity?
How to Calculate Net Worth
At its most basic, net worth is everything you own minus everything you owe.
To calculate your net worth, tally the value of all or your assets, including bank accounts, investments, and perhaps the value of your home or vacation home. Then subtract all of your debts, including any mortgage, student loans, car loans, and credit card balances.
If the resulting figure is negative, it means that your debts outweigh your assets. If positive, the opposite is true.
There is no one net worth figure that everyone should be aiming for. Your net worth, though, can be a personal benchmark against which you can measure your financial progress.
For example, if your net worth continues to move into negative territory, you know that it is time to tackle debts. Hopefully, you’ll see your net worth grow, which can give you some idea that your savings plan is working or your assets are increasing in value.
Your home may, strangely, function as both an asset and a liability. Your home equity—the part of the home you actually own—can be an asset. But your lender may still own part of your home. In that case, mortgage debt is a liability.
As you track your home value and other assets to take your financial pulse, you may find that your home is simultaneously your biggest asset and biggest liability.
Check your score with SoFi Insights
Track your credit score for free. Sign up and get $10.*
Recommended: What Credit Score Is Needed to Buy a Car?
When to Include Your Home in Net Worth
Generally speaking, you may want to include your home as part of your total assets and net worth when you want to leverage the value of the equity you have stored there.
You can tap the equity in your home with a number of financial products. Here’s a look:
Home Equity Loan
A home equity loan allows you to borrow money that is secured by your home. You may be able to borrow up to 85% of the equity you have built up. For example, if you have $100,000 in home equity, you may have access to an $85,000 loan.
The actual amount you are offered will also be based on factors such as income, credit score, and the home’s market value.
You repay the lump-sum loan with fixed monthly payments over a fixed term.
As with home improvement loans, which are personal loans not secured by the property, you can use a home equity loan to pay for home renovations.
Or you can use a home equity loan for goals unrelated to your house, like paying for a child’s college education or consolidating higher-interest debt.
Just remember that if you fail to repay the loan, the lender can foreclose on your home to recoup its money.
Recommended: What Is The Difference Between Transunion and Equifax?
Home Equity Line of Credit
A home equity line of credit (HELOC) is not a loan but rather a revolving line of credit. You may be able to open a credit line for up to 85% of your home equity.
You can borrow as much as you need from your HELOC at any time. Accounts will often have checks or credit cards you can use to take out money. You make payments based on the amount you actually borrow, and you cannot exceed your credit limit.
HELOCs use your home as collateral. If you make late payments or fail to pay at all, your lender may seize your home.
💡 Dive deeper: Guide to How Home Equity Lines of Credit Work
Traditional Refinance
A traditional mortgage refinance replaces your old mortgage with a new loan. People typically choose this path to lower their interest rate or monthly payments.
They may also want to pay off their mortgage faster by changing their 30-year mortgage to a 15-year mortgage, for example, reducing the amount of interest they pay over the life of the loan.
How do net worth and home equity come into play? One important metric lenders use when deciding whether you qualify for a mortgage refinance is your loan-to-value ratio (LTV), how much you owe on your current mortgage divided by the value of your home.
The more equity you have built in your home, the lower your LTV, which can help you secure a refinanced loan and influences the interest rate of the loan.
Cash-Out Refinance
A cash-out refinance replaces your mortgage with a new loan for more than the amount of money you still owe on your house.
The difference between what you owe and the new loan amount is given to you in cash, which you can use to pursue a number of financial needs like paying off debt or making home renovations.
Your cash-out amount will typically be limited to 80% to 90% of your home equity, and interest rates are typically a little bit higher thanks to the higher loan amount.
Recommended: Cash-Out Refinance vs HELOC (Home Equity Line of Credit)
Reverse Mortgage
A home equity conversion mortgage, the most common kind of reverse mortgage, allows homeowners 62 and older to take out a loan secured by their home.
Borrowers do not make monthly payments. Interest and fees are added to the loan each month, and the loan is repaid when the homeowner no longer lives there, usually when the homeowner sells the house or dies, at which point the loan must be paid off by the person’s estate.
Recommended: Should I Sell My House Now or Wait
When Not to Include Your Home in Net Worth
There are a few instances when it doesn’t make sense to include your home in your net worth, or you aren’t allowed to.
Retirement Savings
If you’re using your net worth to get a sense of your retirement savings, it may not make sense to include your home, especially if you plan to live there when you retire.
Your retirement savings represent potential income you will draw on to cover your living expenses. Your home does not produce a stream of income on its own, unless you tap your equity using one of the methods above.
Applying for Student Aid
A family’s net worth can have an impact on eligibility for federal student aid. The more assets a family has, the more that need-based aid may be reduced.
However, the equity in a family’s primary residence is a nonreportable asset on the Free Application for Federal Student Aid (FAFSA®). Most colleges use only the FAFSA to decide aid.
Several hundred colleges, usually selective private ones, use a form called the CSS Profile, which does ask applicants to report home equity, though a number of schools, such as Stanford, Harvard, Princeton, and MIT, have moved to exclude home equity from their considerations for aid.
When Becoming an Accredited Investor
An accredited investor may participate in certain securities offerings that the average investor may not, such as private equity or hedge funds. Accredited investors are seen to be financially sophisticated enough, or wealthy enough, to shoulder the risk involved with such investments.
To become an accredited investor, you must have earned more than $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, or you have a net worth over $1 million. However, you cannot include the value of your primary residence in your net worth.
The Takeaway
Whether or not you include your home in your net worth will depend largely on what you’re trying to accomplish. If you plan to tap your equity, then it is an important figure to include. But it’s not always included when it comes to things like student aid or retirement income.
While your mind is on home equity, maybe you’ve thought about a cash-out refinance, or maybe it’s time to sell and buy anew.
If you’re curious about a home financing or mortgage refinancing options, see what SoFi offers.
Photo credit: iStock/Chainarong Prasertthai
*Terms and conditions apply. (Must click on the link to be eligible.) This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the Rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed into SoFi accounts such as cash in SoFi Checking and Savings or loan balances, Stock Bits, fractional shares and cryptocurrency subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.
SoFi’s Insights tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SORL0523015
