With house prices at record highs, many buyers today struggle to find a 20% down payment, which is the minimum needed to avoid private mortgage insurance when taking out a conventional loan. But financial expert Dave Ramsey thinks a 20% down payment won’t be enough. On the contrary, he is a strong advocate of making a 100% down payment – and avoiding a mortgage altogether.
It is easy to understand why he feels this. When you take out a mortgage, you automatically end up paying more for your home than its original purchase price. This is because you are paying interest on your mortgage which can really add up over time.
Ramsey doesn’t like paying interest. In fact, he has expressed strong opinions against credit cards because he doesn’t like to see consumers throwing away their money unnecessarily.
But while it’s generally a good idea to avoid credit card debt, mortgage debt is a different story. Not only is he considered a healthy type, but for many, he is a necessary type.
Even in a less inflated housing market, you could easily be looking at between $200,000 and $300,000 to buy a home in your ideal neighborhood. It is an amount of money that many of us do not have access to. But even if you To do if you happen to have enough money to buy a house, you might want to consider taking out a mortgage, even though Ramsey might tell you otherwise.
The problem with paying cash for a house
When you invest enough money to buy a house, you are tying up your money in an asset that is not very liquid. And that could prove problematic when in need of money.
A liquid asset is an asset that is easy to sell. Stocks, for example, are very liquid. If you own shares of a company you decide to sell, you can log into your brokerage account, click a button, and sell them there.
Houses are much less liquid because you cannot sell one on a whim. First, you must create a listing for this home and wait to receive an offer from a buyer. Then, once you’ve made a deal with a buyer, it can take several weeks to close that sale, not least because mortgages can easily take 60 days to settle. If you are in dire need of money, you could find yourself in real trouble if your only source is your home.
Also, if you put too much money in your home, you might lose the chance to invest it elsewhere. It could mean not having enough money for retirement because you haven’t saved and invested that money in an IRA.
What’s the right call?
There are obvious advantages to buying a house with cash. And in today’s housing market, a cash offer could give you a noticeable advantage over competing buyers who need to finance a home purchase.
But before you empty your bank account to buy a no-fee home loan, consider the downsides involved. You might be better off making a large down payment on your home, but financing much of it with a mortgage that you pay off over time.
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