Liquid Assets vs. Fixed Assets: Understand the Differences
Having assets can help you qualify for a mortgage loan — and maybe even better interest rates, too. But they have to be the right type of assets first.
Assets fall into two categories: liquid or fixed. While both types are good to have personally, only one really works in your favor when applying for a home loan.
Let’s look at both types of assets — as well as what they mean for your goals as a homebuyer — now.
Liquid Assets vs. Fixed Assets
The main difference between liquid and fixed assets is that liquid ones equal fast, easy access to cash. Checking and savings accounts are obvious examples of liquid assets, but so are things like stocks, bonds, and shares of companies, which can easily be sold (liquidated) and converted into cash. Even your annual tax refund can be considered a liquid asset.
Fixed assets have value, too — particularly as wealth-builders. These include things like cars (if owned outright), real estate, 401K accounts, and Roth IRAs. Fixed assets can be sold and turned into cash, but they usually require either a penalty or a lengthy process for doing so (and sometimes both).
Which Are Best for Buying a Home?
Having assets is important when applying for a mortgage loan, but liquid assets take top priority for lenders. Liquid assets provide a safety net of sorts, essentially ensuring that if you, the borrower, fall behind on your payments or experience a dip in income, you have quick access to cash and can keep paying your loan.
Obviously, if you own a car or a boat, those fixed assets can be sold and the proceeds put toward your mortgage payment, too — but that could take weeks or even months to pan out. Mortgage lenders want to see more immediate access to emergency funds, ideally by way of savings accounts, stocks, and bonds. This makes you a safer bet as a borrower, often qualifying you for better interest rates to boot (especially if you have lots of high-value liquid assets to your name).
Are You Prepared for Your Mortgage Application?
Do you want to learn more about the types of wealth you should build before applying for a mortgage loan? Just want some personalized advice and guidance for your home buying journey? Then get in touch with your local Embrace loan officer today. We’re here to help.