A mortgage is a loan you take out to purchase a home. This home could be your permanent residence, a vacation home, or even a multi-family property. Depending on scenario and person, this loan could be a liability or it could be an asset. That said, there are some key components to look for to decide whether or not a mortgage is a liability or an asset.
Is Mortgage A Liability Or An Asset?
A mortgage, or home loan, is a phenomenal option for those who do not have the cash to outright purchase a property. And let’s face it, with the property values we see in most areas of the United States, most people wouldn’t have that kind of cash available to purchase this investment. These loans allow cost you $X amount in interest however in return they allow you to pay for the property over a period of time.
To really see if your mortgage is an asset or a liability, we have to understand what the definition of each is.
According to Investopedia, “an asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit”. So in layman’s terms, let’s think of an asset as something that is currently providing income or has a high chance of providing income in the future.
Now looking at a liability according to Investopedia, “a liability is something a person or company owes, usually a sum of money”. So again, if we try to put this into reality, a liability is simply when you borrowed something and need to repay it’s value back. Whether that is in time, money, or another form of currency.
When A Mortgage Is An Asset
A mortgage is an asset when this mortgage is actually making you money. If you are the lender of this mortgage, meaning that you let someone use your money to purchase the property, then you are making money because every month they are paying you back with $X amount in interest.
Another case when you could potentially turn a mortgage into an asset is when you purchase a multi-family property and rent out the units. If you are earning more money from the rents than what the mortgage is costing you, then I would consider that mortgage an asset since it allowed you to be earning that money in rent. Without the mortgage, you likely would not have been able to purchase this house with your own cash.
When A Mortgage Is A Liability
A mortgage is a liability when you the borrower, take out the mortgage and have to pay for the monthly expense out of pocket. You took out this home loan likely for a permanent residence or vacation home and are not earning any income from the properties. This income used to pay for the mortgage expense is from your W-2 job or other side hustles.
However, the home you purchased itself is considered an asset. So while you may owe money to the lender, as long as you pay your monthly payments on-time, the home (or asset) remains yours and actually boosts your net worth.
Effects On Your Net Worth
If you borrow money to purchase your home, the mortgage is a liability on your net worth statement. However, the home value is an asset and they can offset each other. This is why as you pay off the debt you owe on the home, your net worth increases.
If you want to increase the home value and therefore increase your net worth, even more, you can do easy renovations yourself or hire someone. These renovations include things like boosting curb appeal by adding some greenery or cleaning up the lawn, or updating the kitchens and bathrooms.
Final Thoughts
While in some cases it can be tempting to purchase a house to feel like you aren’t throwing money away to rent each month, always be sure to see what the actual effects are on your net worth before buying. And of course, make sure you are buying for the right reasons. All of this said, did we answer the question of whether or not a mortgage is a liability or an asset? Well, mortgages can be both an asset or a liability, it really depends on the specific situation. Technically the mortgage you take out as a property owner is debt and therefore a liability. However, the house is an asset!
Do you have a mortgage? Is it on a single-family, multi-family, or vacation home?
For more reads, check out these articles!
Like this one – most people just say “oh, your house is a liability”, but never really factor in the impact on your net worth.