It may be hard for you to consider your mortgage as an asset, especially if the act of writing that huge mortgage payment check each month causes your heart to palpitate and sweat to drip off your forehead. The truth is, while a mortgage can place you deeply into debt, the reward is that you are doing so to build equity in your most valuable asset.
While the real estate you own is considered an asset, your mortgage is considered a liability since it is a debt with incurred interest.
What Are Assets and Liabilities?
According to BusinessDictionary.com, an asset is "something valuable that an entity owns, benefits from, or has use of in generating income." Cash, precious metals, or machinery used in a business venture are all financial assets. A liability, in contrast, is a claim against those assets. An asset can also be any item that can be converted into cash, which includes real estate properties that may or may not currently be mortgaged.
Real Estate as an Asset
In many cases, any real estate you hold may be your largest asset. Real estate may appreciate over time, although economic downturns can mitigate this effect. You can sell real estate you've purchased for a profit, both in the short and long term, and you can also use it as a source of rental income. Once you've built up equity – your ownership stake – in a home by making mortgage payments, you can borrow against the equity if you are in need of money.
Mortgage as a Liability
While it allows you to buy a home and build equity, a mortgage loan is a debt. Because a mortgage creates a legal obligation, it can be considered a liability while you are repaying it. In many instances, the amount you pay in interest over the course of a 30-year mortgage will surpass the principal on the loan. The home-buying process also requires payment of additional expenses like origination fees, closing costs and recording fees.
Asset Versus Liability
While a mortgage itself can be considered a liability, you are using it to pay for what may be the most valuable asset you will ever own. Because of the size of the typical mortgage loan, it is critical that you minimize its potential liability. You can do this by improving your credit to qualify for the lowest interest rate possible when you buy a home, not purchasing more home than you can afford, and possibly refinancing your mortgage after a number of years to a lower interest rate, as economic conditions allow.
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