Liquid Assets vs. Fixed Assets: Understand the Differences (2024)

Having assets can help you qualify for a mortgage loan and maybe even better interest rates. 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 works in your favor when applying for a home loan.

Now, let’s look at both types of assets and what they mean for your goals as a homebuyer.

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.

Still, so are 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 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 (and sometimes both).

How are Liquid Assets Different from Other Assets?

The main difference between liquid assets and other assets is their ease of conversion into cash and the speed at which they can be sold or traded without significant loss of value. Some common examples of liquid assets include:

• Cash
• Savings account deposits
• Money market funds
• Government bonds

On the other hand, other assets like real estate, stocks, and mutual funds can be less liquid and take longer to sell or convert into cash, often with a loss of value.

The distinction between liquid and other assets is important because liquid assets can be used to meet short-term financial needs, while other assets are better suited for long-term investment goals.

Investors and individuals typically aim to have a balanced portfolio of both liquid and other assets for financial stability and security.

What Are Some Examples of Liquid Assets?

Examples of liquid assets include:

• Cash
• Savings accounts
• Money market funds
• Short-term government bonds
• Certificates of deposit (CDs)
• Treasury bills
• Commercial paper
• Foreign currencies

These assets are easily convertible into cash within a short period of time and can be used to meet short-term financial needs. It’s important to note that the liquidity of these assets may vary depending on market conditions and individual circ*mstances.

Is a Car a Liquid Asset?

No, a car is not considered a liquid asset.

A car is considered a tangible asset that is difficult to convert into cash quickly and usually takes longer to sell and is subject to market conditions and depreciation.

Is a 401k Considered a Liquid Asset?

It depends on the specific terms of your 401k account. Generally, a 401k is considered a long-term investment, and funds in a 401k account are not typically considered liquid assets because they are intended for retirement savings and are often subject to restrictions and penalties for early withdrawal.

However, some 401k plans may allow for limited amounts of hardship withdrawals, loans, or in-service withdrawals, which would provide some level of liquidity. It’s best to consult with your plan administrator or financial advisor for specific details on the liquidity of your 401k account.

Is Life Insurance Considered a Liquid Asset?

It depends on the type of life insurance policy you have.

Some types of life insurance policies, such as term life insurance, do not have a cash value component and are not considered liquid assets. On the other hand, some permanent life insurance policies, such as whole life or universal life insurance, build up a cash value over time that can be accessed through loans or withdrawals. These cash values are generally considered liquid assets as they can be easily converted into cash.

However, it’s important to keep in mind that taking loans or withdrawals from a life insurance policy can have tax consequences and reduce the death benefit, so it’s best to consult with a financial advisor before making any decisions about accessing the cash value of a life insurance policy.

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, 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.

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 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 (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.

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.

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