Is Mortgage a Liability?

Liabilities and assets comprise a financial statement. Financial statements help individuals and businesses determine their net worth. Most liabilities are obvious. Since they depreciate in value and cause you to lose money over time, you add them to the liability column. However, mortgages are not so easy to identify as a liability or asset due to the cyclical nature of the real estate market.



Liabilities are debts. Since a mortgage is a type of debt, you might automatically assume that your current mortgage is a liability. However, consider the repercussions of the sale of your home. If the sale of your home at its current market value results in a profit, your mortgage may fall into the asset column. When determining whether to add your mortgage to the liability or asset column of your financial statement, use a short-term and long-term assessment. Paying off a mortgage with no intent to sell creates a liability; but if you are in your home to take advantage of short-term gains in the market, your home can be considered an asset.


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There are many types of assets, including the cash you have on hand, investment portfolios and personal belongings that appreciate in value over time. With the exception of a real estate crisis, experts suggest that a home appreciates in value at a rate of 5 percent per year. This makes some homeowners automatically assume that their homes are assets. However, income-producing real estate is generally referred to as an asset. Mortgages you pay that do not earn you money each month are not considered assets. Once the mortgage makes you a profit, either by sale, property upgrades or through tenants, it is not an asset.


Market and Profits

Poor housing market conditions can lead to foreclosures. Foreclosures, in turn, decrease the market value of your home which can leave you "upside down" in your mortgage. The phrase "upside down" refers to when homeowners owe more on their mortgages than their homes' current market value. A mortgage can become a large liability when the value dips below the balance of your loan. If you sell the home, you lose money. Also, if the value of your home does not appreciate, the sale of your home can result in your breaking even. In this case, your debt does not produce income, and the mortgage is a liability.


Bad Assets

In commercial real estate, the term "bad asset" refers to income-producing real estate that begins to lose money. For example, banks with large amounts of REO (Real Estate Owned) properties on their books may execute strategies to mitigate loss and rid themselves of the bad assets. REO properties are foreclosures that did not sell at auction. For a homeowner, losing money on a mortgage is a liability. Since commercial real estate companies often have sophisticated strategies in place to remedy their losses in investments, the properties they own are still referred to as assets.