While it is technically true that there is some equity in almost every material possession, people who think properly and conservatively about money do not regard the equity in their possessions as contributors to their net worth except in the case of real estate. If you own a home, whatever equity you have in the home is part of your net worth.
Buying a home with a mortgage means you have acquired an asset (the house) which raises your net worth by X. The amount put down and the liability (the loan) lower your net worth by X so the net effect is that buying the large asset does not change your net worth at all, it just changes your cash flow situation. This means that when you make mortgage payments some of it goes to interest (which is an expense that lowers your net worth) and some of it goes to principal (which is just moving assets around between net worth containers, yellow arrows). Whatever interest you pay on your mortgage is a tax-deductible expense, so it is worth tracking. Consider the following transactions:
| Date | Description | Value | From | To |
|---|---|---|---|---|
| 2015-06-01 | Borrowed money for home loan | $250,000 | mortgage loan | home |
| 2015-06-01 | Mortgage principle payment | $100 | checking account | mortgage loan |
| 2015-06-01 | Mortgage interest payment | $900 | checking account | housing expense |
| 2015-07-01 | Mortgage principle payment | $120 | checking account | mortgage loan |
| 2015-07-01 | Mortgage interest payment | $880 | checking account | housing expense |
| 2015-08-01 | Mortgage principle payment | $140 | checking account | mortgage loan |
| 2015-08-01 | Mortgage interest payment | $860 | checking account | housing expense |
| 2015-09-01 | Mortgage principle payment | $160 | checking account | mortgage loan |
| 2015-09-01 | Mortgage interest payment | $840 | checking account | housing expense |
| 2015-10-01 | Mortgage principle payment | $180 | checking account | mortgage loan |
| 2015-10-01 | Mortgage interest payment | $820 | checking account | housing expense |
| 2015-11-01 | Mortgage principle payment | $200 | checking account | mortgage loan |
| 2015-11-01 | Mortgage interest payment | $800 | checking account | housing expense |
The total in the "home" wealth container account is the amount paid into equity which is important for tax purposes when the home is sold. The total "housing expense" spending category will contain all the interest payments which are important for claiming tax deductions.
Both the mortgage loan and home equity are wealth containers that contribute to your net worth.
| Mortgage Loan | |||
|---|---|---|---|
| 2015-06-01 | Borrowed money for home loan | -$250,000 | |
| 2015-06-01 | Mortgage principle payment | $100 | |
| 2015-07-01 | Mortgage principle payment | $120 | |
| 2015-08-01 | Mortgage principle payment | $140 | |
| 2015-09-01 | Mortgage principle payment | $160 | |
| 2015-10-01 | Mortgage principle payment | $180 | |
| 2015-11-01 | Mortgage principle payment | $200 | |
| Total | -$249,100 | ||
| Home Equity | |||
| 2015-06-01 | Borrowed money for home loan | $250,000 | |
| Total | $250,000 | ||
| Net worth in home | $900 |
"Housing expenses" is a spending category and does not contribute to your net worth.
| Housing expense | |||
|---|---|---|---|
| 2015-06-01 | Mortgage interest payment | $100 | |
| 2015-07-01 | Mortgage interest payment | $120 | |
| 2015-08-01 | Mortgage interest payment | $140 | |
| 2015-09-01 | Mortgage interest payment | $160 | |
| 2015-10-01 | Mortgage interest payment | $180 | |
| 2015-11-01 | Mortgage interest payment | $200 | |
| Total | $5100 |