Dave Ramsey Thinks You Should Buy a Home in Cash. Here's Why He's Wrong

Paying cash for a home has its drawbacks.

With home prices at record highs, many buyers today are struggling to come up with 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 cut it. Rather, he's a huge advocate of making a 100% down payment -- and avoiding a mortgage altogether.

It's easy to see why he feels that way. When you take out a mortgage, you automatically end up paying more for your home than its initial purchase price. That's because you pay interest on your mortgage that can really add up over time.

Ramsey is not a fan of paying interest. In fact, he's voiced strong opinions against credit cards because he doesn't like to see consumers throw their money away needlessly.

But while it's generally a good idea to avoid credit card debt, mortgage debt is another story. Not only is it considered a healthy type to have, but for many, it's a necessary type.

Even in a less inflated housing market, you might easily be looking at $200,000 to $300,000 to purchase a home in your ideal neighborhood. That's a sum of cash many of us don't have access to. But even if you do happen to have enough cash to buy a home outright, you may want to consider getting a mortgage -- even though Ramsey might tell you otherwise.

The problem with paying cash for a home

When you plunk down enough cash to buy a home outright, you tie up your money in an asset that isn't very liquid. And that could prove problematic if a need for money arises.

A liquid asset is one that's easy to sell. Stocks, for example, are very liquid. If you own shares of a company you decide to unload, you can log into your brokerage account, click a button, and sell them on the spot.

Homes are far less liquid because you can't just sell one on a whim. First, you have to put together a listing for that home and wait to get an offer from a buyer. Then, once you enter into a contract with a buyer, it could take many weeks to close on that sale, namely because mortgages can easily take 60 days to settle. If you have a pressing need for money, you could end up in a real jam if your only source of it is your home.

What’s more, if you put too much money into your home, you might lose out on the chance to invest it elsewhere. That could mean not having enough money for retirement because you didn't save and invest that cash in an IRA.

What's the right call?

There are clear benefits to buying a home in cash. And in today's housing market, a cash offer might give you a notable advantage over competing buyers who need to finance a home purchase.

But before you empty your bank account to buy a home mortgage free, consider the downside involved. You may be better off making a sizable down payment on your home, but financing a large portion of it with a mortgage you pay off over time.