Most people do not really calculate their net worth for various reasons. Though, it is pretty useful to calculate and know your net worth statement every once in a while. Your net worth statement will provide a sort of a financial report card of how well you are doing financially.
It can be a vital indicator for future planning, for example, buying a house and coming up with a retirement strategy. Most people who calculate and determine their net worth statements also set up net worth targets and create a baseline for future planning. This motivates them to increase their net worth over time so that they have a high net worth as they approach retirement age.
Simply put, your net worth is the value of what you own minus any of your liabilities or debt. This formula may seem simple, but it is not that simple to determine and figure out what your assets are valued and what your liabilities are. Oftentimes, the mortgage is the most difficult liability to calculate to determine your net worth.
Are you also facing the same issue? If so, do not worry, because I will explain all the basics there are for you to know regarding a mortgage and how to calculate your net worth with a mortgage. Without any further ado, let’s get straight into the article!
What is a Mortgage?
A mortgage is basically a loan, or a type of it, taken from a bank or any other financial institution that helps the borrower purchase a house, a piece of land, or any other type of real estate. The borrower, after acquiring the loan, agrees to pay the loan back over time.
A mortgage is usually a long-term debt that spans up to 15 to 30 years. This long period is known as a term. During the whole term, the borrower repays the amount they borrowed, and oftentimes an interest is charged for the loan.
The borrower usually has to repay in a series of regular intervals. Typically, the borrower pays in the form of a monthly payment, which may include both the principal and the interest charges.
Calculating Net Worth with Mortgage
There is one basic way that I will discuss here calculating net worth with a mortgage. This is to subtract the mortgage from the value of your house. For example, if you have a house that is worth $300,000 and has a mortgage of $100,000, you have $200,000 in equity. Thus, you deduct your liability i.e. the mortgage and can go on to add your home value to find your net worth.
If you have a mortgage on any of your other houses as well, you just have to subtract that either from your total value of assets or just from the value or worth of your house on which the mortgage applies. You should note that whether your home is an asset or a liability, the mortgage will always be counted as a liability.
How Does the Mortgage Process Work?
To get a mortgage, you will have to work with a bank or any other financial institution that will lend you the loan. Usually, before you start the process of getting a mortgage, you will discuss and get an idea of the maximum sum your lender is willing to lend and the interest they will charge.
After that, the approval process starts, which is typically a thorough process that involves many steps. You will have to provide proof of your income, a list of assets, and a whole bunch of other documents. You will also have to provide evidence to the lender that you are capable of repaying the loan. This evidence may include your financial statements or any sort of proof of current employment.
Once the approval process is finished, your lender will lend you the loan of a certain amount, typically with an interest charged as well.
What is Included in a Mortgage?
There are four main components of a mortgage payment. These four components are principal, interest, insurance, and taxes. Though, there can be other costs involved in some mortgage payments as well. You do not have to worry about that as you will be going through everything before the approval process.
1) Principal
The principal in a mortgage payment is the specific amount of money that the lender lends you so that you can purchase your house.
2) Interest
Interest is what the lender charges you for borrowing the money. It is often expressed as the percentage rate and is considered as the annual cost you pay to the lender for borrowing the loan.
3) Property Taxes
Property taxes are also associated with the house that you are buying and are collected by the lender. They are typically held in escrow.
4) Insurance
Insurance provides you and the lender with a bit of protection in any case of a disaster, such as any accident that may damage your property. The insurance is collected by the lender as a premium part of your mortgage payment.
Conclusion
Mortgages are one of the biggest liabilities that people have. Therefore, it is essential that you know how to determine your mortgage and how to calculate net worth with a mortgage. The lesser the mortgage, the higher your net worth will be. If you need any further help, feel free to leave a comment and I will be sure to get back to you.