What Percentage of Your Net Worth Should Your Home's Value Be?

Building wealth is a balancing act between assets and liabilities.

Building wealth is a balancing act between assets and liabilities.

When you get close to your 30s, you might start thinking more about your financial well-being. Your net worth is one way to keep score on how you’re handling your money. Net worth is all your liabilities -- things you owe money on -- subtracted from the sum of your assets, or stuff you own outright. When you begin to figure your net worth out, you'll find your house is likely one of the biggest factors impacting your wealth.

Value Your Home

Since a house is not a liquid asset -- one you can easily and quickly convert to cash -- valuing it for net worth purposes is a little tricky. You can value it based on the equity -- appraised value minus the mortgage on it. But can you really sell it for that much? That's an unknown, especially in light of the ups and downs of the housing market. The best way to handle this uncertainty is to be conservative in your value estimate. You can find the value of your home in a couple of different ways. You can visit real estates websites such as Zillow.com, Trulia.com or Realtor.com that provide free estimates based on your address. Or, for a more exact and thorough estimate, you can hire an appraiser to provide a professional assessment. The cost varies by where you live, but this can usually be done for about $250 to $350.

Net Your Worth

Netting something out, financially speaking, means figuring out what's left over after all the positives and negatives have been combined together. To find your net worth you subtract all your liabilities, or debts, from your assets such as your bank accounts, investment accounts, and the combined monetary value of houses, cars and other items you own. The amount that remains after this calculation is your net worth. You can have a positive or negative net worth based on whether or not you have more assets or more liabilities.

Houses and Net Worth

A February 2013 article in "Bloomberg BusinessWeek" addressed the topic of home ownership as a percentage of net worth by citing a study from Sebastien Betermier, an assistant professor of finance at McGill University. According to Betermier, from 1983 to 2012 the principal residence as a share of net worth hovered around 30 percent for the richest 20 percent of U.S. households. For the next 60 percent -- which includes most households -- the principal residence rose from 62 percent to 67 percent of total wealth over the same time frame.

Finding the Sweet Spot

So what percentage of your net worth should be tied to your home's value? Opinions vary. But a good rule of thumb is: the lower the better. There's just too much uncertainty in home values, as many homeowners have learned during various housing bubbles. To protect yourself in a risky environment, you need to diversify your investments. One way to accomplish this is to reduce the percentage of your wealth represented by your home value. In other words, strive to get closer to the 30 percent range of the wealthiest households instead of the 60-plus percent range of most households. Don't buy more house than you can reasonably afford. This will help ensure that you have sufficient money left over to invest in other areas.


About the Author

Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.

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