Author Topic: Best place to save a home downpayment?  (Read 2293 times)

EconDiva

  • Handlebar Stache
  • *****
  • Posts: 1096
Best place to save a home downpayment?
« on: September 05, 2013, 11:23:38 AM »
I'm looking to save 25k for a house and giving myself 4 years to accomplish this.

What's the best type of account for me to save these funds?

WageSlave

  • Stubble
  • **
  • Posts: 178
  • Location: Chicago, IL, USA
Re: Best place to save a home downpayment?
« Reply #1 on: September 05, 2013, 11:59:37 AM »
In most cases, the highest-yielding savings, checking or insured money market account you can find.  At today's rates, 1% is considered "good" for such an account.  You want such an account to be non-volatile and liquid.

If you want a to reach for a little more returns (but with greater risk), you might consider short-term bonds or bond funds.  I did this for a small portion of my house down payment savings.  In particular, I used Vanguard's Short-Term Tax Exempt Bond Fund.  I'm actually closing on a house later this month, and my returns have been all of $11 over my initial deposit... effectively a 0% return.  I would have been better off keeping this money in a high yield savings account.

BlueBeard

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Best place to save a home downpayment?
« Reply #2 on: September 05, 2013, 12:07:15 PM »
MangoMoney

ioseftavi

  • Bristles
  • ***
  • Posts: 401
  • Location: NYC
Re: Best place to save a home downpayment?
« Reply #3 on: September 05, 2013, 01:07:52 PM »
The best paying money market accounts or short-term CDs you can find.

Occasionally, t-bills or t-bonds (short term) or a short-term bond fund could be the way to go, but at present rates (insanely low), you are basically looking at some risk of principal loss if rates rise and you sell the fund early.  I'd say it's not worth it for the extra 0.5-2%, especially on an amount the size you're talking about.

Take a look at bankrate.com and find the best money market account or CDs you can - the site is well run and generally a good indicator of the best you'll find for cash-like products.

Bankrate.com Money market finder

Bankrate.com CD finder (don't look at 5 year ones, obviously, if you want to buy a house in 4)

Best rates I found were something like 0.7-0.85 for money markets, and 1.45% for a 3 year CD. 

It should go without saying, but the stock market is too volatile and your time period too short for that to be a match.  I would suggest you do the best you can to try and increase your 'stache, and just accept that (for the time being), rates on cash-like investments suck. 

To illustrate: Imagine if you started saving for a house in 2005 and decided to save for it by putting your saved funds in the stock market for a 3 or 4 year purchase.  Sometime in 2009, you'd be depositing your 25,000th dollar, housing prices would be cheap as hell, and you'd go to your vanguard account and see that all of your savings were now worth around $16,000.  The stock market is an awesome wealth creating tool, but if you start to roll the dice with it during short time periods, you are asking to get screwed.

It may be tempting to go further out on the risk curve (start looking at short-term bonds...then long term bonds...then junk bonds...then lending club woooooooo!), but if you are thinking of reaching for the money in the next couple of years, I'd suggest leaving it in cash-like instruments and just working to increase your savings rate, rather than the rate you're getting on your savings. 

Hope this helps!
« Last Edit: September 05, 2013, 01:10:34 PM by ioseftavi »