U.S. CitiesCity-Data Forum Index
Go Back   City-Data Forum > General Forums > Economics > Personal Finance
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
Reply Start New Thread
 
Old 01-26-2015, 01:06 PM
 
Location: Moscow
2,080 posts, read 3,068,090 times
Reputation: 2564

Advertisements

Quote:
Originally Posted by mizzourah2006 View Post
So you couldn't sell your house if you needed to? I can only sell my house if I own it outright?
Where do you get that from? When you sell your house you get two things (hopefully) equity to put into your next home, and money that is used to pay off your existing mortgage.
Reply With Quote Quick reply to this message

 
Old 01-26-2015, 01:16 PM
 
2,303 posts, read 2,260,568 times
Reputation: 3833
Quote:
Originally Posted by Keim View Post
That $160k can't be accessed until the house is sold. At which point you will then use it to payback the bank. Until the bank is paid back what you have is a $160k debt, because the bank owns $160k worth of your home.

You do not own that $160k worth of your house. It is not your asset to claim. The bank owns it. You have taken on a debt that you are slowly paying.

Doubt me? Burn down the house. Does the bank expect you to continue paying your mortgage?
That's as ridiculous as saying that cash doesn't count as an asset because if you burn the cash you have nothing.

Yes, you have a debt. No one is denying that a mortgage is a liability. How do you calculate Equity in a house though?

Selling price - Mortgage balance = Equity.

Look up basic accounting. Equity is nothing more than the difference between assets and liabilities. Equity itself is NOT an asset.

The house is the asset, the mortgage is the liability, the equity is the difference. If all you had was a house and a mortgage, your net worth is your equity.

Let's play out your example, when you sell off the house and pay off the mortgage of $160k, what do you have left?

That $40k is your net worth because it's what you have when you take all things of value and turn them to cash, then pay off everything you owe.

If it wasn't, then where did it magically come from?

Quote:
Originally Posted by Keim View Post
Where do you get that from? When you sell your house you get two things (hopefully) equity to put into your next home, and money that is used to pay off your existing mortgage.
You get one thing. You get $200k of cash. You then have to use some of it to pay off your mortgage, however once your house is sold, you have the Net amount. Hence, your net worth is $40k because that's what's left over.
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:18 PM
 
Location: Southlake. Don't judge me.
2,835 posts, read 3,759,621 times
Reputation: 3673
Quote:
Originally Posted by Keim View Post
That $160k can't be accessed until the house is sold. At which point you will then use it to payback the bank. Until the bank is paid back what you have is a $160k debt, because the bank owns $160k worth of your home.

You do not own that $160k worth of your house. It is not your asset to claim. The bank owns it. You have taken on a debt that you are slowly paying.

Doubt me? Burn down the house. Does the bank expect you to continue paying your mortgage?
As multiple people have pointed out, you don't define "asset" the way it used here on planet Earth. The house is, in fact, an "asset". It is a not very LIQUID asset, but that's an entirely different issue.

Regarding your example of "burning down the house", you might note that a mortgage holder virtually always REQUIRES an owner to carry insurance on their house, for exactly that reason. A mortgage is a secured loan, with the mortgaged property being the security (hence the term "mortgaged property"). If you stop paying your mortgage for any reason, the bank can (essentially) take over the house and liquidate it to pay the debt. I would note that if you had a 200K house, a 160K mortgage, and you promptly lost your job and stopped paying the mortgage and the bank then sold your house for the 200K, the bank would take its 160K and give you the 40K remaining.

If your house burnt down, you would have a 200K casualty LOSS. Sane people insure against this. Mortgage lenders require insurance against such LOSS because it protects their security interest in the property. This is generalities, we could get into recourse loans vs. nonrecourse loans and who knows what else.

However, as several people have already pointed out, here on Planet Earth, Net Worth is Assets less Liabilities, not Only Highly Liquid Assets less All Liabilities. Heck, extending your logic, got a million in equities? Well, that doesn't count cause they could drop in value tomorrow! Own a small business that generates a million bucks net profit a year? Worthless because the physical plant could burn down and you can't just sell it!

There is certainly something to be said about financial planning when one's net worth is highly illiquid, but that doesn't mean you just ignore such assets when calculating net worth, and to be precisely on point, it CERTAINLY doesn't mean the Census Bureau numbers ignore illiquid assets in net worth. In fact, you could go to the Census burea and bring up the actual spreadsheet the article's chart was based on and see the values for various assets at each age group.

ETA- and as also noted, you can set cash on fire even easier than a house. Doesn't mean it's not an asset.
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:27 PM
 
4,546 posts, read 4,731,891 times
Reputation: 3595
Quote:
Originally Posted by Keim View Post
Where do you get that from? When you sell your house you get two things (hopefully) equity to put into your next home, and money that is used to pay off your existing mortgage.

So then how do you have a negative net worth?
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:35 PM
 
18,859 posts, read 13,621,188 times
Reputation: 14281
100k in cash, no debt = 100k in net worth

100k in real estate, no debt = 100k in net worth

200k in real estate - 100k in mortgage debt = 100k in net worth

200k in real estate - 100k in credit card debt = 100k in net worth

200k in real estate - 200k in mortgage debt = 0 net worth


It really is all that simple
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:48 PM
 
3,946 posts, read 4,044,691 times
Reputation: 4417
It's kinda funny this conversation veered off in a discussion about how the real estate portion of net worth is calculated when the real jaw dropper is that at the 70% percentile of the oldest group (and therefore the most time to gain from the time value of money) the value is only $344k. That number spins off less than $20k in income at the very most. At the 5th quintile according to the report and as of 2011, that number more than doubles to $900k, still pretty low.

The $900k number spins off $50k at the most which is not bad but not a salary that is really commisurate with the earnings of the top 20% except for the ones who got there by being really good savers.


In short, hope a lot of people are praying for social security to be solvent for a long time.
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:49 PM
 
Location: Moscow
2,080 posts, read 3,068,090 times
Reputation: 2564
Quote:
Originally Posted by synchronicity View Post
Regarding your example of "burning down the house", you might note that a mortgage holder virtually always REQUIRES an owner to carry insurance on their house, for exactly that reason. A mortgage is a secured loan, with the mortgaged property being the security (hence the term "mortgaged property"). If you stop paying your mortgage for any reason, the bank can (essentially) take over the house and liquidate it to pay the debt. I would note that if you had a 200K house, a 160K mortgage, and you promptly lost your job and stopped paying the mortgage and the bank then sold your house for the 200K, the bank would take its 160K and give you the 40K remaining.

If I own the property, how can the mortgage holder require me to do anything in regards to something I own? Oh, that's right, they can require it because they own part of the property. IN this case, they own 4/5th's of the property.

I can't count the full value of the house as an asset. I don't own it. The asset is the equity.

On a related subject-I'm loving how people are coming down on my insurance example. Yes, you can insure the house against fire. And if it burns, who does the money go to? You use the insurance money to pay the bank for the portion of the house they still own.
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:51 PM
 
3,673 posts, read 4,937,285 times
Reputation: 2422
Quote:
Originally Posted by mizzourah2006 View Post
So then how do you have a negative net worth?
if your house is worth 200k and you owe 1M to the bank. your net worth (assuming you have nothing else) is then -800k.

Quote:
Originally Posted by Keim View Post
That $160k can't be accessed until the house is sold. At which point you will then use it to payback the bank. Until the bank is paid back what you have is a $160k debt, because the bank owns $160k worth of your home.

You do not own that $160k worth of your house. It is not your asset to claim. The bank owns it. You have taken on a debt that you are slowly paying.

Doubt me? Burn down the house. Does the bank expect you to continue paying your mortgage?
The $160 can't be accessed until the house is sold (let's just assume that for now). it is still an asset.
but, if you're adamant about thinking about it in the flawed way you're thinking about it above, then use the same mentality about your debt to the bank, which is: You don't owe the bank 160k 'today'. you owe them 160k over 30 years, so you can't count it as liability today!
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:52 PM
 
Location: southwestern PA
20,419 posts, read 37,664,790 times
Reputation: 39054
Quote:
Originally Posted by Jeo123 View Post
Has a lifetime of savings for a person at 65 really only averaged out to $170k?

These numbers just seem really low.
One thing to consider is that many of those over 65 are drawing SS and more than likely pensions also. They don't need as much in lifetime savings as younger ones will.
Reply With Quote Quick reply to this message
 
Old 01-26-2015, 01:57 PM
 
Location: North Idaho
2,172 posts, read 2,085,035 times
Reputation: 2599
Quote:
Originally Posted by Pitt Chick View Post
One thing to consider is that many of those over 65 are drawing SS and more than likely pensions also. They don't need as much in lifetime savings as younger ones will.
Only about 37% of current retirees collect a traditional defined benefit pension. Obviously, fewer will do so in the future.

Dave
Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Economics > Personal Finance
Follow City-Data.com founder on our Forum or

All times are GMT -6.

2005-2019, Advameg, Inc. · Please obey Forum Rules · Terms of Use and Privacy Policy · Bug Bounty

City-Data.com - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 - Top