I have a 7.34% HYSA--with a catch. Should I put more into it?

[Tasse]

This question touches on asset allocation, asset location, and the dreaded mortgage payoff question, all at once.

The state of Ohio has a "Homebuyer Plus" program that offers enhanced interest rates on savings accounts, provided that you sign an affidavit that the full amount will be used for the down payment + closing costs on a house within five years. https://tos.ohio.gov/homebuyerplus/

My husband and I have an apartment we like and are getting to know the area where we want to buy in the next few years. Houses we like go for $250-300k ish. We have $60k cash earmarked for a down payment; $46k of it is in the Homebuyer account (representing about 4% of our NW). As mentioned in the title, this gets 7.34% interest.

There are some hardship exceptions where you can get the money back out if you lose your job or have catastrophic medical bills, but short of a BIG emergency, there is no flexibility on that money. Therefore, we've been nervous about overcommitting to the account. There's also no guarantee the interest rate will stay that high, although I think it is safe to expect the rate will stay higher than other HYSAs. We essentially get paid interest both by the bank and by the State Treasury, so we'll still be double dipping even if rates drop.

Honestly, typing out the part about the non-guaranteed rate swayed me pretty hard against putting more in there. But let me finish the explanation so you can see if you agree.

I'm revisiting this question recently because I'm considering whether to move to a more conservative asset allocation. This consideration is not driven by market conditions (I have held 100% stocks for eight years now and never blinked), but by recent changes in our personal circumstances. We now expect to be a single-income household for a while, and projections suggest we are probably within 5 years of a full FIRE date. Both those elements have started me thinking about protecting our progress so far. And why would I buy bonds at 4% when I have 7% available?

So putting extra into this account would give us a nice yield before buying a house and lower our mortgage payment once we do buy a house, which would lock in lower expenses as we approach FIRE. On the other hand, if rates drop across the board before we buy, that would both hurt our yield in the savings account and commit us to putting a fat down payment on a lower-rate mortgage.

Specific options with numbers:
- Move up to $14k cash from lower-rate accounts (~4%) to the Homebuyer account. This money is already earmarked for our down payment, but we wanted to keep flexible access to it in case we buy on the cheaper end of the spectrum and don't need it all to make a 20% DP.
- Pull up to $50k out of our brokerage account (currently 100% stocks) at 0% LTCG to beef up the down payment and collect more sweet sweet 7% interest.

ETA: The account has a total contribution limit of $100k. $10k of contributions are deductible on state taxes per year, so I probably wouldn't want to fill the account all the way up, as I'd want to leave room for a deductible contribution next year at least.

What do the esteemed Mustachians think?

[merula]

Almost makes me want to move to Ohio!

If you bought a home at a price where a 20% down payment were less than the balance of this Homebuyer Plus account, would you be required to use the whole balance on a down payment? Would that make sense with your FIRE goals?

I would say that if your FIRE goals include minimizing your recurring expenses, like lowering your mortgage payment through a larger down payment, there would be very little downside to moving the max amount into this account. A quick google shows that the bar for not using the funds for an OH house seem pretty squishy.

("If a change in circumstance occurs that is outside the accountholder’s control and was never envisioned when the Ohio Homebuyer Plus account was opened, the accountholder may keep all the money saved as well as the interest accrued in their account. Examples may include an employer requiring the accountholder to relocate out of state, the sudden loss of employment, or unforeseen health ailments and corresponding medical bills." and "sudden loss of employment" sounds like it could include FIRE.)

On the other hand, if your FIRE plans are more on the side of the "DON'T pay off your mortgage" thread here, then I would say that oversaving in that account is not in line with your overall plans.

[Bartlebooth]

I would max out the account as reasonable.  The time is right for you to de-risk and the financial benefits are nothing to sneeze at.

[Tasse]

If you bought a home at a price where a 20% down payment were less than the balance of this Homebuyer Plus account, would you be required to use the whole balance on a down payment?

Yes, we'd have to put the whole thing toward down payment or closing costs.

A quick google shows that the bar for not using the funds for an OH house seem pretty squishy.

("If a change in circumstance occurs that is outside the accountholder’s control and was never envisioned when the Ohio Homebuyer Plus account was opened, the accountholder may keep all the money saved as well as the interest accrued in their account. Examples may include an employer requiring the accountholder to relocate out of state, the sudden loss of employment, or unforeseen health ailments and corresponding medical bills." and "sudden loss of employment" sounds like it could include FIRE.)

I seriously doubt that they would accept voluntarily quitting your job as an example of "sudden loss of employment." Especially when it is so easily proven that we planned ahead for it. And if they determine you don't meet their exceptions, they can claw back the interest and pursue you for perjury. I am not inclined to play chicken with those stakes.

As to all your questions about our FIRE goals, I don't know! I've never had to decide where I fall on the mortgage payoff question before! That's why I'm asking!

I would max out the account as reasonable.  The time is right for you to de-risk and the financial benefits are nothing to sneeze at.

What do you consider reasonable, though?

[merula]

I seriously doubt that they would accept voluntarily quitting your job as an example of "sudden loss of employment." Especially when it is so easily proven that we planned ahead for it. And if they determine you don't meet their exceptions, they can claw back the interest and pursue you for perjury. I am not inclined to play chicken with those stakes.

I think FIRE is rare enough that it wouldn't even occur to anyone *to check* that you had planned to lose your job. No one plans to lose their job. And if I understood your initial post correctly, you are planning to remain in Ohio and purchase a home with these funds, which makes you eligible.

I'm not a lawyer, and I don't live in Ohio, so you might want to talk to someone who is both of those things, but I deal with legal documents a lot, so I will say this: examples are only examples. The "Examples include" sentence of that statement from the OH Treasurer does not restrict the applicability of the first sentence to only those examples. If the intent of a law is to limit the qualifications to only listed circumstances, the law is written not as examples but as a defined list.

It also seems weird to me that a state would pursue legal action against a citizen for something short of outright fraud, but maybe there are examples of this in your local media.

[Fru-Gal]

Sounds like you have weighed pros and cons and I would say do it. This is putting your savings/investments to work for you in acquiring shelter. Maybe do some final searching for anyone having trouble with that specific home-buying account. Of course you could do the same thing (nearly) with a different HYSA. Also wasn’t there a disability/family hardship involved in going down to one income?

[Tasse]

@merula, this is a pretty new program so I doubt there is any precedent for when/how they punish people for not following the rules.

However, I signed something saying I intend to put all the money in that account toward a house, barring circumstances that were "outside my control and never envisioned" when I opened the account. I'm fine with taking advantage of that if something truly unexpected comes up--and I'm glad that provision exists, because it helps me feel safer tying my liquid assets up like this--but I'm not comfortable saying that FIRE was "outside my control and never envisioned." I'm a rule-follower at heart.

Looking up those rules reminded me of another relevant one: the account has a maximum contribution limit of $100k. I'll edit the OP to mention this.

Also wasn’t there a disability/family hardship involved in going down to one income?

Arguably yes, but we actually went to one income over a year ago, before we moved to Ohio or opened this account. The recent change is that we've decided to quit pursuing a second income for now. I don't think that qualifies under their rules, and besides, I don't WANT to pull money out right now, so it's not really relevant. But it's nice to know that if we lost our one income, this money would be able to serve as an additional emergency fund.

[AuspiciousEight]

Honestly I would put all non tax advantaged new money into the account until you buy your house or hit 100k in the account. So I would max out your 401k and iras and hsas, then put everything afterwards into the account until you buy your house. Then after you buy the house I would probably just pay it off in a similar fashion of putting all non tax advantaged money toward the mortgage.

I am sort of biased though because I really like the feeling of having a paid off house. It helps me to feel secure that I have a paid off house to live in and I prioritized having a paid off house early on in my FIRE journey over everything else almost, basically to help me sleep better at night.

[Tasse]

We don't have the cashflow to do that without pulling money out of the market. My income covers our living expenses and maxing 403b / HSA / IRAs, but only barely. Which is one reason it hadn't occurred to me to do this earlier.

But as mentioned, we do have space to pull money out of the market at 0% LTCG, assuming that no new job is forthcoming this year (not guaranteed, but that's what I'm tentatively planning around.)

[Tasse]

I have not been able to model this scenario in a way that feels meaningful.

If you just do the simplest possible math, where the mortgage is added to your spending and 25x your spending is your FIRE number, then a larger down payment = a smaller FIRE number, by a difference more than the difference in down payment. To illustrate using a calculator:

$300k house @ $60k DP = $2326 x 12 months x 25 = $697.8k stash needed to fund.

$300k house @ $100k DP = $2065 x 12 months x 25 = $619.5k stash needed to fund.

Putting $40k into the DP brings the target $78.3k closer.

The flip side of course is that if you leave the $40k in the market instead of putting it in the DP, it grows. And how much it grows depends on the timescale. Over ~5 years to get to FIRE, not that much; over the 30 years of a mortgage, a lot.

I know I'm essentially summarizing the D/POYM problem here, I'm just still working on wrapping my head around it.

[Tasse]

One thing my number crunching has clarified is that lower rates are so helpful on mortgage cost that it mostly swamps the effect of whatever we decide to do with the DP. Low rates + good market is the "worst case scenario" for pulling money out of the market and into a mortgage, but they turn out looking almost the same when I run the scenarios. It's hard to mess up that golden ticket. So my concern about the rate not being guaranteed is probably not that important.

ETA: Also, one of the arguments against prepaying a mortgage is that you aren't any safer until it's all the way paid off--no matter how much you overpay this month, you still owe the bank the same amount next month. But that isn't true of a larger DP: a higher prepayment lowers your ongoing payments for the life of the mortgage.

[FireLane]

If I were in your shoes, I'd max out that homebuyer account. 7.34% is an astoundingly good interest rate, plus a tax deduction for contributing? That's as good as it gets.

If I understand correctly, your concern is that interest rates might fall and this money would still be locked up in the homebuyer account (and eventually in home equity), whereas it would have yielded a higher return if you'd invested it in stocks instead.

I can see that, but in my opinion, the downside risk is low. If you buy a house and this money is more than 20% of the purchase price, that's not a bad thing. In that case, you wouldn't have lost anything, you've just secured a lower mortgage payment and/or a shorter payoff term. If $46K is 4% of your NW, then $100K would still only be 8.7%. To my mind, that's a very reasonable percentage to have in low-risk assets.

Also, that money isn't permanently inaccessible for any other purpose. If something catastrophic happens that completely upends your plan, then it sounds like you do have a good legal argument for taking the money out, given @merula's post about how the law is worded.

Just for perspective, I'm not one of the "don't pay off your mortgage" types. I had a low-interest-rate mortgage, and I still paid it off before I retired. Mathematically, I know I'd have more money today if I had thrown every extra dollar into the market. But to balance that out, there's a peace of mind that comes with knowing you don't owe anything to anybody. I'll happily trade a statistically higher NW for less volatility and more stability. I don't regret that decision.

[Tasse]

What helps me sleep at night is knowing I'm doing the mathematically optimal thing! :D But the answer to that question depends on what you're optimizing for.

I finally figured out how to model this in cFIREsim in a way I'm happy with. As I expected, a higher DP slightly improves success rates while slightly lowering the average final value. What surprised me is that, while it lowered the average final value, it increased the median final value. Which I think we should care about more!

It also suggested my ~5ish year estimate to FIRE might be too conservative. When I modeled [work years] + [DP for mortgage] = [success rate]:
1 year + $60k DP = 76% (https://www.cfiresim.com/363b7bb9-cf91-4f8a-92da-276f36c42f38)
1 year + $100k DP = 77% (https://www.cfiresim.com/377177be-7833-4784-9e46-4251fa22e5ef)
2 years + $60k DP = 86% (https://www.cfiresim.com/d3e97ba8-f518-483e-bea2-99cce3b6b382)
2 years + $100k DP = 89% (https://www.cfiresim.com/dfbe27db-c8ec-4c54-883e-f979a9a35e23)
3 years + $60k DP = 97% (https://www.cfiresim.com/72d36a7c-6ac6-4d2a-bd83-a244e995dc96)
3 years + $100k DP = 99% (https://www.cfiresim.com/01c6885a-d059-47fb-9035-0ab12f9d2b00)

(The growth of cash is higher in the higher DP scenarios to reflect the higher proportion of cash held at the high rate.)

And that's all while ignoring social security.

Belated ETA: However, it's also ignoring our considerable charitable donations, which will slow us down! Back to my original timeline estimate!