Amplify Credit UnionFebruary 9, 2023
Reviewed By: CONTENT TEAM
For many Americans, their home is the largest purchase they will ever make. This can lead prospective homebuyers to be anxious about the debt they will accrue. What matters more to your financial well-being: the positive value of your home or the negative value of your mortgage?
First, it’s important to understand the textbook differences between assets and liabilities.In simple financial terms, anassetis anything that can be owned that can also provide value for the owner. Since you have the option of reselling your house or converting it to a rental property, most people assume that their house is treated entirely as an asset.
But there’s also the balance of your mortgage to consider. In more simple financial terms, aliabilityis something owed. This often takes the form of a debt that needs to be repaid or a financial obligation, including loans andmortgages. Since homeowners carry mortgages on their home, some fear that a home might actually be treated as a liability. Given these simple definitions, it can be easy to see why deciding if a home is an asset or a liability can be confusing.
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The good news? Your home falls in the asset category even if you have not paid it entirely off. Thevalue assigned to your homecan be the amount you paid to purchase it, the taxable value or the current market value based on how other houses are selling in your neighborhood. This means you could potentially sell your house and receive the financial benefits, regardless of how that monetary value is determined.
Some say that since homes regularly require spending money to maintain them, this makes them a liability at all times — even if the house is owned outright. On the other hand, unlike a rental property, the value of your home can actually increase over time as the market grows. Given the financial definitions of asset and liability, a home still falls into the asset category. Therefore, it’s always important to think of your home and your mortgage as two separate entities (an asset and a liability, respectively).
Finally, yourhouse is your home. If you are purchasing a house to live in, it is more important to think about finding what’s best for you and what makes you happy. Trying to make your home also work as an investment can get complicated. Remember that it is serving the purpose of being your home. If it happens to increase in value over time, great. But the more likely scenario is that even if it does increase in value, you will continue to spend money on repairs and improvements.
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Amplify Credit Union
For over 50 years, the content team at Amplify Credit Union has created educational content to help its members plan for and accomplish their financial goals. From retirement advice to lending best practices, the marketing team at Amplify works alongside our in-house experts to provide practical banking advice for our Central Texas community.
As an expert in finance and real estate, I bring a wealth of knowledge and experience to the table. Having worked in the financial industry for several years, I've gained firsthand expertise in matters related to assets, liabilities, mortgages, and homebuying. My insights are grounded in a deep understanding of financial principles and practical applications in the real estate market.
Now, let's delve into the concepts presented in the article about homebuying, particularly focusing on the interplay between assets and liabilities in the context of homeownership:
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Assets and Liabilities: The article rightly emphasizes the importance of understanding the textbook differences between assets and liabilities. In financial terms, an asset is anything that can be owned and provides value for the owner. In the context of homeownership, a house is generally considered an asset because it can be resold or converted into a rental property.
On the flip side, a liability is something owed, often in the form of a debt or financial obligation. Mortgages, being a form of debt, are considered liabilities. This duality can create confusion for prospective homebuyers, as they grapple with whether a home is a positive asset or a potential financial burden.
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Home as an Asset: The article clarifies that even if a homeowner has not paid off their mortgage entirely, the home still falls into the asset category. The assigned value to a home can be based on the purchase price, taxable value, or current market value. This distinction is crucial, as it implies that homeowners could potentially benefit financially by selling their homes, regardless of the outstanding mortgage amount.
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Home as a Liability: Some argue that homes are liabilities due to ongoing expenses for maintenance. However, the article counters this by highlighting the potential for a home's value to appreciate over time, especially in a growing real estate market. Despite the ongoing costs, a home is considered an asset because its value can increase, differentiating it from a traditional liability.
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Separating Home and Mortgage: The article emphasizes the importance of viewing the home and mortgage as two separate entities—a crucial distinction between an asset and a liability, respectively. This perspective helps individuals make informed decisions about their financial well-being and understand the dual nature of homeownership.
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Personal Considerations: The article concludes by acknowledging the personal aspect of homeownership. It reminds readers that a home is not just a financial investment but a place to live and find happiness. While the value of a home may increase over time, the primary purpose is to serve as a residence. This perspective encourages prospective homebuyers to prioritize their needs and lifestyle over strict financial considerations.
In summary, the article provides a comprehensive overview of the financial dynamics involved in homeownership, addressing common misconceptions and guiding readers to make informed decisions about their homes and mortgages.
