Should I Include My Home Equity in My Net Worth Calculation?

Your net worth is an important measure of your financial health.

One common question is whether your home equity should be included in that calculation. While it’s technically part of your net worth, it doesn’t function the same way as cash or investments. Simply put, it isn’t easily accessible.

Understanding how home equity should be factored into your overall wealth can help you get a clearer picture of your finances and set more realistic goals.

In one Reddit thread, the poster asked whether to count the value of their home equity in their net worth. And the answer is that while home equity is typically included, it is not as liquid as other assets, so it can be useful to think about it differently.

What goes into net worth?

There’s a simple formula you can use to calculate your net worth. It’s basically the total of your various assets minus your liabilities.

Here’s an example of how to calculate your net worth (including your home equity):

Assets:
IRA – $1 million
Brokerage account – $100,000
Savings account – $100,000
Home value – $800,000
Total Assets – $2 million

Liabilities:
Mortgage balance – $300,000

After subtracting total liabilities from total assets, that brings your net worth to $1.7 million. If you were to exclude your home equity, your net worth would fall to $1.2 million.

While people commonly include home equity in their net worth, it’s financially healthy to treat it differently from your other assets by distinguishing between your Total Net Worth and your Investable Net Worth. For those pursuing financial independence, home equity is often considered a “static asset” because it does not generate monthly cash flow to cover living expenses.

Equity, Liquidity, and Market Context

In this example, to access your $500,000 in home equity, you have two options: you could either borrow against it or sell your home. However, borrowing via a HELOC or cash-out refinance increases your debt and is subject to current interest rate environments, which may be significantly higher than your primary mortgage rate. This “lock-in effect” can make equity less liquid than it appears on paper.

It can help to differentiate your net worth goals from your savings goals. Using the above example, say you’re aiming to save $2 million for retirement. You currently have $1.1 million for that purpose (IRA + brokerage account). In that case, you should focus on accumulating another $900,000 in liquid or investable assets, rather than counting your home equity toward that spendable goal.

Optimizing Equity for the Future

Your net worth is a broad snapshot of your overall financial health, so it is definitely worth tracking. However, if much of your wealth growth is tied to home appreciation, you may want to rebalance your focus toward your investment portfolio.

If you approach retirement with significant home equity, “Equity Optimization” through downsizing could help you convert that value into usable funds. Selling a larger home and moving to a lower-cost-of-living area allows you to port the remaining cash into a brokerage account or use it to maximize catch-up contributions under SECURE 2.0 guidelines, effectively turning a static asset into an income-generating one.

Editor’s Note: This article was updated to include the distinction between total net worth and investable net worth, added context regarding the impact of interest rates and the “lock-in effect” on home equity liquidity, and introduced the concepts of equity optimization and SECURE 2.0 catch-up contributions for retirement planning.