Author Topic: Where to save downpayment money for a house?  (Read 6459 times)

atromic

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Where to save downpayment money for a house?
« on: January 27, 2014, 07:30:57 PM »
I'm still in the process of cutting down my monthly expenses and breaking the paycheck to paycheck cycle, but now that I've been turned on to Mustachianism I'm starting to think a little more long term. Cutting my monthly expenses in half and reigning in my wasteful spending has really opened my eyes as to what I can start putting away, and I think in 3 years time I should have my 20% squirreled away for a starter house in my city.

My question is where should I put this money? I have a Vanguard Roth IRA with a few grand in index funds... Should I keep upping my contribution into the index fund and plan on pulling some out penalty free when I'm ready to buy? What should I do with the overflow once I max my contribution? Some sort of bond mix in a non-retirement account like MM recommends?

FWIW I'm 28 y/o and should break $45,000 this year. I should be getting a significant bump in pay after a year or so, and I'd like to have a total of $45,000 for the down-payment.

Stache In Training

  • Stubble
  • **
  • Posts: 223
Re: Where to save downpayment money for a house?
« Reply #1 on: January 27, 2014, 10:06:12 PM »
At 45k a year, you should be able to have more money after all of your savings than just the 5000 roth max.  so I'd say you should be able to accumulate your down payment without needing to withdraw the principal of your roth.

So two paths, that came to mind right away:
You can just open up a taxable vanguard account, and invest in there.  This way it'll most likely grow.  Only drawback, a lot of people are saying there's a bubble right now, so if the stocks tank, you might end up with less than you had before.  Or if it grows, you'll obviously be hit with taxes.  But that's all a personal preference and/or gamble that only you can really decide.

If it were me, and with the short, 3 year time-frame you're looking at; I'd probably keep that in the highest interest bank account I could get.  Yeah, you won't be getting as much growth, but its guaranteed not to go away either.  Which may give you some piece of mind, if buying a house in 3 years is a "must-have" goal for you.
(I (as does MMM) use capitalone360.  It has a .75% interest rate, which is 4 times higher than any credit union or bank I've been able to find.  Also, great customer service. Here's my refer a friend link, if you need it. https://r.capitalone360.com/fvMaBF6sbX If you use the link, and open with like 250, you'll get 20 and I'll get 20, I believe.  Please don't feel like I'm pushing you towards my link though.  In fact, I think MMM has a bit better of a sign-on bonus somewhere on his blog.  Either way, use a sign-up bonus, because FREE MONEY!)

So after that, if you have anything after your IRA contributions and savings towards your down payment and/or after your pay bump, I'd open up a taxable vanguard account, put it into the total stock market index, and just let it sit/keep contributing, but not withdrawing unless an emergency.

Good luck!
« Last Edit: January 27, 2014, 10:08:36 PM by Stache In Training »

lb

  • 5 O'Clock Shadow
  • *
  • Posts: 25
Re: Where to save downpayment money for a house?
« Reply #2 on: January 27, 2014, 10:27:26 PM »
I have the same question! We are also saving towards a downpayment on a house with a 3-4 yr timeline. We decided to put it into a Ally money market account which has 0.84% interest, which was the highest rate we could find from a reputable internet bank. Not sure if it's the right choice but we don't have the risk tolerance with this money to invest it in stocks over such a short timeline.

If you know for sure the minimum amount of time you would be willing to not touch the money you could put it into a CD, which do have slightly higher rates but not much: I think Ally has a 2 yr CD with a rate of 1.10%. I haven't really looked into the pros and cons of these.

We are also maxing out our Roth IRAs which could be used for a home purchase but hopefully we'll keep them for retirement if possible.

Does anyone else have any good ideas for what to do with short term savings that are lower risk?

athomeintheworld

  • Bristles
  • ***
  • Posts: 299
Re: Where to save downpayment money for a house?
« Reply #3 on: January 28, 2014, 12:14:39 AM »
Pentagon FCU CD's usually seem the highest return

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 35
  • Location: Missouri
Re: Where to save downpayment money for a house?
« Reply #4 on: January 28, 2014, 03:27:35 AM »
Buying stocks (whether it's index funds through Vanguard, dumping money into Betterment, whatever) with your house fund is risky. The stock market will likely go up in the foreseeable future. But what if it doesn't? What if you have $40,000 in an investment account, and the market pulls back 15%. Now you're down to $34,000. Do you pull that money out and put less down on your house than you intended? Do you leave it in and wait for the market to rebound? What if it takes another three years for the market to gain back that 15%? Now imagine the drop is even more than 15%. Over 17 months from 2008 to 2009 the Dow dropped 54%. So now your $40,000 is worth $18,400. We recovered fairly quickly after 2008/2009, but it took 25 years to recover from the great depression.

Your best bet for money you know you will need in two or three years is the highest yielding savings account or CD you can find. It's honestly the only smart option. For a house fund, I wouldn't fool around with investments. I'd only put my money where there is guaranteed return (a bank).

atromic

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Where to save downpayment money for a house?
« Reply #5 on: January 28, 2014, 10:29:14 AM »
Great advice. I'm pretty happy with the .85% I'm getting on my discover online bank account. I think I'll build up a few grand in that account to also serve as my emergency fund, then start buying CDs from discover as well. Looks like anything longer than a 12 month term will get me into the 1%-1.35% range.