Table of Contents
TL;DR
Home equity is real wealth, but it is not the same as cash, investments or retirement savings. It can take time and money to access, its value depends on the housing market, and you still need somewhere to live after selling. Count home equity in your net worth, but also track how much of your financial position depends on one property.
The Net Worth Illusion: Home Equity Edition
Imagine a family living in a home valued at $650,000 with a remaining mortgage of $200,000. They also have $25,000 in retirement savings and little else invested.
Their home equity is $450,000:
$650,000 Home Value − $200,000 Mortgage = $450,000 Home Equity
Their total net worth is actually $475,000 after adding the retirement account. On paper, that number looks strong.
The problem is concentration. About 95% of this family’s net worth is tied to one house in one local market. Only $25,000 sits outside the property in retirement savings. Unless the family has unlisted cash reserves, a large repair, job loss or urgent expense may still create pressure, even with hundreds of thousands of dollars in home equity.
This does not mean the family is poor or that the home should be excluded from net worth. Home equity is valuable. It means a balance sheet dominated by a primary residence can look stronger on paper than it feels in everyday life.
The Federal Reserve’s 2022 Survey of Consumer Finances confirms that housing is an important wealth source for homeowners. Among families owning a primary residence, median net housing value, defined as home value minus debts secured by that home, reached about $200,000 in 2022. But the amount and importance of home equity varies greatly from one household to another.
Liquid vs. Illiquid Assets: Why It Matters
Two people can have the same net worth and very different levels of financial flexibility.
A household with $300,000 split between cash, retirement accounts and taxable investments can access some of that money without moving home. A household with $300,000 entirely in home equity may need to borrow against the property or sell it before turning that value into spendable cash.
Liquid Assets
Liquid assets are assets that can generally be accessed quickly. Savings accounts and money market funds can usually be used within days and without selling a home. Brokerage investments are also commonly described as liquid because they can generally be sold quickly, though their market value may rise or fall before the money is needed.
Liquid assets can help cover an emergency, fund a move, provide retirement income or support a period without wages. They are not all risk-free, but they are easier to reach than property equity.
Illiquid Assets Such as Home Equity
Home equity works differently. You cannot use the equity in your kitchen or bedroom to pay a medical bill without taking another step.
To access it, you generally must sell the home or borrow against it through a home equity loan, home equity line of credit or similar arrangement. Borrowing adds debt and may put the home at risk when payments become unaffordable. Selling requires time, transaction costs and a new housing plan.
Sale costs also reduce the amount of equity you can actually carry away. Agent compensation is negotiable, and closing expenses vary by location and contract, but seller costs, repairs, transfer charges, legal or title expenses and moving costs can consume thousands of dollars from the sale proceeds.
Home equity belongs in net worth. It just should not be treated as if it were the same as cash in a bank account.
The Overconcentration Risk
Diversification is not only an investing concept. It matters across your full household balance sheet.
There is no official rule stating that a home must remain below a fixed percentage of net worth. A recently purchased home may naturally represent a large share of a younger household’s assets. Someone nearing retirement may still choose to hold substantial equity in a paid-off residence because lower housing debt supports monthly cash flow.
The risk begins when nearly everything depends on one asset.
Return to the family with $450,000 in home equity and $25,000 in retirement savings. Their $475,000 net worth may feel reassuring, but their security is strongly tied to:
- Local home prices remaining stable
- Their ability to stay in the property
- Their ability to cover maintenance, insurance and taxes
- Their access to enough liquid cash when an emergency occurs
A large home equity figure can hide a thin emergency fund or an underfunded retirement plan. It may also encourage homeowners to assume they are prepared for retirement when selling the home would require paying for another place to live.
A better question is not simply, “How much equity do I have?” It is, “How much of my net worth remains outside my home and is available for future needs?”
What Happens When the Housing Market Drops
Home equity can rise when property values increase. It can also fall quickly when the housing market weakens.
During the housing crash, the S&P Cotality Case-Shiller U.S. National Home Price Index recorded a national peak-to-trough fall of roughly one-third between 2006 and 2012. The exact decline varied dramatically by city and neighborhood, but the lesson was clear: a household concentrated in one home could see a major share of net worth disappear without missing a single mortgage payment.
Apply a smaller decline to the $650,000 home example. A 15% fall in market value reduces the home’s estimated value by $97,500:
New Home Value: $552,500
Mortgage Balance: $200,000
New Home Equity: $352,500
Assuming the retirement account remains at $25,000, total net worth falls from $475,000 to $377,500. A 15% decrease in one asset creates a net worth decline of more than 20% because the mortgage balance does not decline simply because the home’s market value fell.
A diversified household can still lose money during a broad economic downturn. Investments are not protected from market declines. But relying almost entirely on a single property creates a concentrated exposure to one housing market and one asset that cannot be sold in small pieces.
The Right Way to View Home Equity in Net Worth
Home equity should be included in your net worth calculation. Leaving it out would ignore a major asset you genuinely own.
The correct method is straightforward:
Current Home Value − Mortgage and Home-Secured Debt = Home Equity
Use a conservative current market estimate for your home. Subtract your remaining mortgage principal, home equity loan balance and any outstanding home-secured line of credit. The result is your equity position.
Then place that figure in context. Track three numbers, not just one:
- Total net worth: Everything you own minus everything you owe.
- Home equity: The amount of your net worth tied to your primary residence.
- Non-home net worth: Cash, investments, retirement accounts and other assets, minus non-housing liabilities.
Non-home net worth gives you a clearer picture of financial flexibility. A household with $500,000 in total net worth and $450,000 tied to a home is in a different position from a household with the same total net worth split between home equity, retirement investments and accessible savings.
Build liquid and investable assets alongside mortgage equity. An emergency fund can cover short-term problems without new borrowing. Retirement accounts can support future income needs. Taxable investments may provide flexibility before retirement. Your home can remain a powerful asset without carrying the full burden of your financial future.
How to Track Your Full Net Worth Beyond Home Equity
A complete balance sheet makes concentration visible. Add your home’s current value as an asset, then enter your remaining mortgage and home-secured borrowing as liabilities. Next, add cash, retirement accounts, brokerage investments, vehicles, business equity and other debts.
A calculator that helps you track your full net worth places your home alongside every other asset category and shows your total assets, total liabilities, net worth and portfolio breakdown. When most of your asset value comes from real estate, you can see immediately that building cash or investment assets deserves attention.
Update your mortgage balance each time you review your net worth. Update your home’s estimated market value conservatively, perhaps once or twice a year rather than reacting to every online estimate change. Then compare home equity growth with your non-home assets.
Practical personal finance resources on measuring assets, debts and long-term wealth are also available through NetlyWorth.
Home Equity Is Wealth, but It Is Not the Whole Picture
A home can be one of the most valuable assets you ever own. It can build equity over time, lower housing costs after the mortgage is paid and provide meaningful long-term stability.
But home equity is illiquid, expensive to access through a sale and exposed to one local property market. Count it accurately. Appreciate what it adds. Then keep building the cash and investment assets that give your net worth greater flexibility and balance.