Home Equity vs. Net Worth: Understanding the Difference

People use "home equity" and "net worth" almost interchangeably sometimes. They shouldn't. These are related but distinct concepts, and confusing them can lead to real financial blind spots.

Let's untangle the two—and explain why the distinction matters for your financial decisions.

The Definitions

Home Equity

The portion of your home you own outright. It's the difference between your home's current market value and what you owe on it.

Home Equity = Home Value − Mortgage Balance(s)

If your home is worth $450,000 and you owe $280,000, your home equity is $170,000.

Net Worth

Everything you own minus everything you owe. It's your complete financial picture.

Net Worth = Total Assets − Total Liabilities

Assets include your home, savings, investments, retirement accounts, vehicles, and other valuable property. Liabilities include mortgages, car loans, student loans, [credit card debt](/blog/heloc-vs-credit-card), and any other obligations.

How They're Connected

Home equity is a component of net worth. It's typically the single largest one.

Here's a simplified example for a typical household:

Assets:

Liabilities:

Net worth: $685,000 − $325,000 = $360,000 Home equity: $450,000 − $280,000 = $170,000

In this case, home equity represents 47% of the household's total net worth. For many Americans, this percentage is even higher—often 60-70% for middle-income homeowners.

Why the Distinction Matters

1. Liquidity

This is the biggest practical difference. Net worth includes liquid assets (cash, stocks, bonds) that you can access quickly. Home equity is illiquid—you can't spend it at the grocery store.

To convert home equity into cash, you must either:

• Sell the home (takes weeks to months, costs 6-10% in fees and commissions)
• Borrow against it (HELOC, [home equity loan](/blog/best-heloc-lenders-2026), or [cash-out refinance](/blog/cash-out-refinance-guide)—all require applications, appraisals, and add debt)
• Do a reverse mortgage (only available to homeowners 62+, with significant costs)

A person with $500,000 in home equity and $5,000 in savings has a high net worth but very low financial flexibility. In an emergency, that equity can't help them quickly.

2. Diversification Risk

When home equity dominates your net worth, your financial health is heavily tied to one asset—your house. And that house is in one specific location, subject to one local economy, one housing market, and one set of risks.

Consider two people with identical $400,000 net worth:

Person A:

• $350,000 in home equity
• $30,000 in retirement accounts
• $20,000 in savings

Person B:

• $150,000 in home equity
• $180,000 in retirement accounts
• $70,000 in savings/investments

Person A is "equity rich" but concentrated. If their local housing market drops 20%, they lose $90,000—nearly a quarter of their net worth. Person B would lose $36,000 from the same decline—less than 10% of their net worth—because they're diversified.

3. Retirement Planning

This is where the confusion gets dangerous. Many people approaching retirement look at their home equity and feel wealthy. But unless they plan to sell the home or downsize, that equity won't pay for groceries, healthcare, or travel.

A retiree with $800,000 in home equity and $100,000 in retirement savings faces a very different reality than one with $300,000 in home equity and $600,000 in retirement savings—even though both have $900,000 in total.

The second retiree can draw $24,000-$36,000 per year from investments using the 4% rule and still live in their home. The first retiree must either sell, take a reverse mortgage, or find other income.

4. Borrowing Power

Lenders look at both, but differently:

• Home equity determines how much you can borrow against your property (HELOCs, home equity loans)
• Net worth (along with income and credit) affects your overall borrowing profile for all types of credit

Having high equity but low overall net worth can be a warning sign to lenders that your finances are concentrated and potentially fragile.

5. Tax Treatment

Home equity and other net worth components are taxed very differently:

• Home sale profits: Up to $250,000 ($500,000 for married couples) are tax-free under the [primary residence exclusion](/blog/capital-gains-tax-real-estate).
• Retirement account withdrawals: Taxed as ordinary income (traditional) or tax-free (Roth).
• Investment gains: Taxed at capital gains rates (0%, 15%, or 20% depending on income).
• [Home equity borrowing](/blog/home-equity-loan-vs-heloc-2026): Not taxed (it's a loan, not income), but interest is only deductible if funds are used for home improvements.

Understanding these differences affects how you should structure your wealth for tax efficiency.

The "House Rich, Cash Poor" Problem

This is the most common consequence of confusing home equity with overall financial health. Here's what it looks like:

Profile:

• Home worth $600,000
• Mortgage balance: $150,000
• Home equity: $450,000
• Retirement savings: $50,000
• Emergency fund: $8,000
• Other investments: $0
• Net worth: $508,000

On paper, this person has a half-million-dollar net worth. In practice, they have $8,000 they can actually access, minimal retirement savings, and nearly 90% of their wealth locked in their house.

This situation is surprisingly common, especially among:

• Long-time homeowners in areas with strong appreciation who never prioritized other savings
• Homeowners who paid off their mortgage aggressively while neglecting retirement accounts
• People who inherited homes without other financial assets
• Retirees who stayed in appreciating homes for decades

How to Fix It

If you're house rich and cash poor, your options include:

1. Start redirecting. Once your mortgage rate is low enough, stop making extra payments and invest the difference in retirement accounts or diversified investments.
2. Downsize. Sell the high-equity home, buy something smaller (or rent), and invest the difference.
3. Borrow strategically. A HELOC at a reasonable rate can provide liquidity and a safety net. Just use it responsibly.
4. Rent out space. An ADU, basement apartment, or room rental generates income from your property without selling.
5. Consider a reverse mortgage. For homeowners 62+, this converts equity into income or a line of credit. The costs are significant, but it solves the liquidity problem without selling.

How Home Equity Fits Into a Healthy Net Worth

Financial advisors generally recommend that no single asset class dominate your net worth excessively. While there's no universal "right" number, some guidelines:

Equity-to-Net-Worth Ratio by Life Stage

These aren't rigid rules. A 35-year-old with 70% of net worth in home equity is fine if they're aggressively saving in retirement accounts alongside it. A 60-year-old with the same ratio needs a plan.

The Balanced Approach

The healthiest financial position combines:

• Sufficient home equity (at least 20% for no PMI, ideally more for a cushion)
• Adequate emergency fund (3-6 months of expenses in liquid savings)
• Growing retirement savings (15% of income going to tax-advantaged accounts)
• Some taxable investments (for goals between now and retirement)
• Manageable debt (low-rate mortgage is fine; high-rate consumer debt is not)

Tracking Both Numbers

Home Equity: Check Quarterly

1. Look up your mortgage balance (lender's website or app)
2. Estimate your home's value (Zillow, Redfin, or your gut sense of local market)
3. Subtract

Net Worth: Check Monthly or Quarterly

1. List all assets and their current values
2. List all debts and their current balances
3. Subtract total liabilities from total assets

There are free tools that automate this:

• Mint/Credit Karma: Aggregates accounts and tracks net worth automatically
• Personal Capital (Empower): Excellent for investment tracking alongside net worth
• YNAB: Budget-focused but tracks net worth well
• Spreadsheet: A simple Google Sheet works if you prefer manual control

What to Watch For

Healthy trends:

• Net worth growing steadily over time
• Home equity as a declining percentage of net worth (because other assets are growing)
• Emergency fund staying at 3-6 months of expenses
• Debt decreasing (especially high-interest debt)

Warning signs:

• Home equity growing while retirement savings stagnate
• Net worth flat or declining despite making mortgage payments (other debts offsetting)
• Emergency fund below one month of expenses
• Home equity exceeding 70%+ of net worth in your 50s or 60s

Home Equity as a Wealth-Building Tool

Despite the risks of over-concentration, home equity remains one of the most effective wealth-building tools available:

The Leverage Advantage

When you buy a $400,000 home with 10% down ($40,000), you're controlling a $400,000 asset with $40,000. If the home appreciates 5% ($20,000), that's a 50% return on your actual investment—not 5%. This leverage works in reverse too (a 5% decline wipes out half your equity), but over the long term, it's been a powerful wealth accelerator for American homeowners.

The Forced Savings Effect

Many people who struggle to save money consistently have no trouble making their mortgage payment. The mortgage acts as forced savings—every payment builds equity whether you're disciplined about saving elsewhere or not. This behavioral benefit is real and significant.

The Tax Advantages

• Mortgage interest deduction (if you itemize)
• Property tax deduction (up to $10,000 SALT cap)
• [Capital gains exclusion](/blog/home-sale-exclusion-guide) on sale ($250K/$500K)
• No tax on unrealized appreciation

These benefits make housing one of the most tax-advantaged asset classes for individual investors.

Frequently Asked Questions

Is home equity included in net worth?

Yes. Home equity is one component of your net worth. Your net worth equals all assets (including home equity) minus all liabilities.

Can I have a high net worth but low home equity?

Absolutely. A renter with $500,000 in investments and no debt has a $500,000 net worth and zero home equity. Conversely, a homeowner with $500,000 in equity and $495,000 in other debts has high equity but a net worth of only $5,000.

Should I pay off my mortgage to increase my net worth?

Paying off your mortgage converts debt into equity but doesn't change your net worth—it was already accounted for. The question is really about asset allocation: is your money better used paying down a low-rate mortgage or invested elsewhere at potentially higher returns?

How do I include home equity in my financial plan?

Include it in your net worth calculation, but plan your living expenses and retirement around your liquid assets. Think of home equity as a reserve or bonus—not your primary funding source for retirement spending.

Does home equity count for retirement planning?

It should be part of the picture but not the whole picture. Consider it a backup plan: if needed, you can downsize, get a reverse mortgage, or borrow against it. But your primary retirement income should come from savings, investments, Social Security, and pensions.

What percentage of net worth should be in my home?

There's no magic number, but financial planners generally suggest keeping home equity below 50% of total net worth by mid-career, and below 30-40% as you approach retirement. The younger you are, the more acceptable a higher ratio is.

Should I invest instead of putting money into home equity?

At current mortgage rates (6-7%), paying down your mortgage is equivalent to a guaranteed 6-7% return. That's competitive with or better than many investments on a risk-adjusted basis. The optimal split depends on your tax situation, mortgage rate, risk tolerance, and whether you've maxed tax-advantaged accounts.

The Bottom Line

Home equity and net worth are related but different numbers that tell different stories about your finances. Home equity tells you how much of your home you own. Net worth tells you where you stand overall.

The smartest approach is to build both—but not at the expense of one for the other. Grow your home equity through regular payments, smart improvements, and time. Simultaneously, build liquid wealth through retirement contributions, emergency savings, and diversified investments.

When you look at your finances, look at the whole picture. Your home is likely your biggest asset, but it shouldn't be your only one.

Related Articles

• [[Home [Equity Explained](/blog/home-equity-explained)](/blog/what-is-home-equity): What It Is and How to Build It](/blog/home-equity-explained)
• Property Taxes Explained: How They Work and How to Reduce Them
• Blended Family Home Planning: Merging Households and Managing Home Equity