More than five years ago, as my husband and I shopped for a home, the real estate agent told us over and over again that our home would be a huge asset, and that it would be a great investments.
While this has proved true in some ways, one of those ways isn’t in terms of finances.
Your Mortgage is a Liability
We like to think that we “own” our home, but the reality is that the bank really owns most of it at this point. We think of homes as assets, and they can be, since they are there, and sitting on a plot of very-tangible land.
However, the mortgage on your home is a liability. It’s a loan, and you are paying interest on it. If you have a mortgage, you have a liability. When you figure your net worth, you have to subtract the amount of money you owe on your mortgage from its market value.
If you are underwater on your home, meaning that it has lost value since you bought it, your mortgage is higher than your home’s value, and your home isn’t even a true asset.
How Liquid is Your Home?
One of the things to consider when you invest in something is its liquidity. How quickly you can convert something into cash matters when it comest to investing. Most stocks are fairly easy to convert into cash: You just have to sell them.
A home is a different matter. Sure, if you have equity built up in your home it’s possible to borrow against it and get cash that way. But if you are borrowing against the equity in your home, you aren’t actually investing. That’s not liquidity in the sense that you can easily sell your asset.
Often, it is difficult to sell your home and realize a profit. You have to go through an entire process to sell your home, and it can take months. A home really isn’t a very liquid asset, and that can come back to haunt you later if you view your home as an investment.
View Your Home as an Emotional Asset
A couple of years ago, my home value was low enough that we were about $3,000 underwater. Now home values in my area of improved a little bit, and the home is worth more than we owe for it. However, by the time we figure maintenance and utilities, and taxes, and interest, even with appropriate tax deductions we probably wouldn’t break even if we sold today.
Instead of thinking that our home is going to provide us with a tidy return on our financial investment, we view it as an emotional asset. It’s nice to be settled in one place, and to know that a landlord can’t end our lease and require us to move. Our son enjoys living in a house with a nice backyard. The house provides with a sense of safety and security, and that is valuable in its own way.
What do you think? Do you view your home as an asset?
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