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I know this question has been asked in different formats previously, but I'm curious about the variables that should go into the decision making process.

I have enough in savings, excluding retirement accounts, for an all-cash home purchase. At the same time, interest rates are super low. Does it make more sense to do an all cash purchase, make a large down payment, or take a 15 or 30 year fixed rate mortgage?

In my particular situation, I'm inclined to maintain some liquidity (an all cash purchase will exhaust most of my current savings). I have been and will continue to fund all of my retirement accounts (max each year).

At a minimum, I'd like to maintain a 12 month emergency fund, plus ~5% for unexpected home repairs. I'm also leaning towards maintaining some liquidity for other potential investments (maybe a rental property, maybe continue to invest in index funds). In the worst case scenario, that liquidity can be used for living expenses if we're in a very prolonged downturn.

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At a minimum, I'd like to maintain a 12 month emergency fund, plus ~5% for unexpected home repairs. I'm also leaning towards maintaining some liquidity for other potential investments (maybe a rental property, maybe continue to invest in index funds). In the worst case scenario, that liquidity can be used for living expenses if we're in a very prolonged downturn.

That would have been the first question: Will you still have enough money for an emergency fund and whatever else you need?

I am assuming that all the student loans, auto loans and credit cards have paid off. You mention that you will still fund your retirement accounts, which is great.

You then have to decide if you want all/most of your net worth wrapped up in your house.

If the market changes and you can't sell when you want, you might have a problem affording the next place. Note that being difficult to sell is different than selling at a loss. I had a place that when the number of potential buyers shrank, it was hard to even get somebody to look at your place because there were a lot for sale. But if you drop the price then they think it has problems so they never even visit the property.

Even with the house 100% paid for you still have housing costs. Insurance is required if you have mortgage. But you should still insure the property, because if it burns down that is your pile of cash burning. Don't forget property taxes, and maybe even a Home Owners Association fee.

Taxes can be complex. In some jurisdictions property taxes and interest is deductible. But depending on your exact situation, you might get zero benefit from those deductions. Some people push a mortgage just to get the interest deduction. That was always a complex analysis, but if you can't deduct those expenses from your taxes then that reason for a mortgage evaporates.

Remember there is no guarantee that the value of the house will increase or even stay level. I have neighbors who have waited 10 years to recover the value of their property because they bought just before the market cratered in the mid 2000's, they now wonder what will happen to their house value after COVID-19.

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  • This wrote most everything I would have wrote, with one addition: Some people do really 'sleep better at night' being debt-free. For a long time now (past 20+ years at least) the math has shown that the mortgage interest rate is much lower than the avg return on investment in the market. However, it is hard to argue against someone who pays extra on their mortgage to be out from under it sooner, again because they 'sleep better at night'. This personal feeling of risk management has to be determined by each individual. – R. Hamilton Jun 4 '20 at 15:33

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