Author Topic: Investing Part of Home Down Payment Settings  (Read 786 times)

RangerOne

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Investing Part of Home Down Payment Settings
« on: March 20, 2017, 12:31:10 PM »
I am saving for a home down payment in San Diego. Realistically it would be nice to have somewhere between $80-$100k to have a down payment in the range of 20% of a starter home which tend to be between $400k and $500k.

We currently have $40k which I will probably keep in our capital one high yield money market account. Its kind of family money so I have agreed not to do anything risky with it. I am only keeping gains on $10k of it, while the rest is just a $30k set aside in our name for a home purchase if we chose to make one.

Once I get another $10k saved up I was considering opening a Vanguard Life Strategy account like VASIX to try to get better than 1% yields over the next 3-5 or so years. So I would like to have about half our down payment $40k-$60k, invested with a bit of market exposure.

We have a pretty flexible living situation where we are paying to live in a family owned property with not time limit on how long we can stay. So I can afford to whether a down market and try to wait out a good time to buy for us.

Does anyone have any alternate recommendations or think that I should just go for CD's instead to get slightly better returns on more of the money. It seems like if I am willing to be flexible in my waiting period I should come out ahead with a VASIX account.

thorbjorn88

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Re: Investing Part of Home Down Payment Settings
« Reply #1 on: March 20, 2017, 04:23:44 PM »
I've been having very similar questions myself about what to do with the money I'm saving for a down payment. I look forward to some good insight here!

Goldielocks

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Re: Investing Part of Home Down Payment Settings
« Reply #2 on: March 20, 2017, 11:53:10 PM »
CD's, Bonds, or other guaranteed investments if you absolutely need to pull the money within 3 years, and can't stand a 30% loss at that time.

Radagast

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Re: Investing Part of Home Down Payment Settings
« Reply #3 on: March 21, 2017, 12:07:33 AM »
It is a pretty common question actually, but it never gets far I guess because it is such a transient state and there are really no perfect answers. I posted on several threads and spent quite a bit of time on Bogleheads trying to get an answer and made a pretty good plan I think, but I have at least 7 years to save.

Balanced funds are ok but a little tax inefficient and they don't glide per your short schedule. If you are ok with a little risk I would start off with the full 10k in stocks, then add bonds with new money. Personally I plan to go with buying a zero coupon treasury bond corresponding to my date (I will err on the late side, if I need it early at least I have a decent chance of favorable yield curve action). Get to about 40% stock 60% bonds as fast as you can, then reduce stock percent by approximately 10% per year until you hit your target. Optimal, no. Pretty good though. Of course if you want to gamble with the odds in your favor more in stock results in likely more money. However I still want my wife to like me even if the market tanks at exactly the wrong time.

MustacheAndaHalf

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Re: Investing Part of Home Down Payment Settings
« Reply #4 on: March 21, 2017, 07:33:15 AM »
In your situation I might allocate:
1/3rd Vanguard Total Stock Market
2/3rd Vanguard Tax-Exempt Bond

People saving for houses in California are very likely in the 25% tax bracket or higher.  So a tax-exempt bond fund has better yield (2.2% no Fed tax) than a Total Bond Fund (2.5% becomes 1.9% after taxes).  If you buy Vanguard LifeStrategy, you wind up with 80% bonds and about half that money in Vanguard Total Bond.  Fine for a retirement account, but not as good in taxable.

You can't take too much risk, thus the 1/3rd stock.  You said you have some flexibility with the timing and even the amount of house you'll buy, which figures in here.  You'll want to sell the stock and bonds before your house search starts - you don't want the stock market ruining escrow.  An additional reason / aside: Vanguard refuses to wire money into an escrow account.  So months before your search, sell the stocks / tax-exempt bond fund and transfer that money to the bank account that will hold your down payment.

If you wind up having to spend a very specific amount at a very specific time, then I would go with all CDs for the entire down payment.  But with some flexibility, and half the down payment locked up in banks / CDs already, you could take some risk.


Radagast - Watch out for "imputed interest" on those zero coupon bonds.  You can owe taxes even in years when you receive $0.

oldmannickels

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Re: Investing Part of Home Down Payment Settings
« Reply #5 on: March 21, 2017, 07:38:28 AM »
How much are you saving per month. If you are living in SD and making a good salary saving a total of $80k should not even take 3 years. I think you should invest all the money now save for your emergency fund and re-evaluate in a year or so whether you need to start saving for the house.

Scortius

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Re: Investing Part of Home Down Payment Settings
« Reply #6 on: March 21, 2017, 02:05:13 PM »
We're in the same boat.  Possibly looking to buy once the RE market heats up this summer.  For that short of a horizon, we're simply keeping it in cash.  Yes, we're missing out on some possible gains, but I feel investing should be done with a long horizon, buy and hold and all that.  If your horizon is 3 years or less, I believe CDs or Ally is totally fine.

RangerOne

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Re: Investing Part of Home Down Payment Settings
« Reply #7 on: March 21, 2017, 05:08:37 PM »
How much are you saving per month. If you are living in SD and making a good salary saving a total of $80k should not even take 3 years. I think you should invest all the money now save for your emergency fund and re-evaluate in a year or so whether you need to start saving for the house.

Savings rate is okay, but not great. Still trying to tighten the budget but we are 1 income with a baby. My current budget sets us up to save around $3k per quarter or $12k per year. Could probably get that to $4.5k with a bit more tightening. But we could just as easily miss that target if we get complacent.

But in general your analysis isn't wrong, we would in theory be at or near the $80k mark in 3 - 4 years. But I also have to pay off a $6k student loan. And $10k on my car. So I am losing about 1 year to take care of those.

Granted the student loan is 2.3% and the car loan is 1.7% interest I still don't want any debts when I go house shopping.

Scortius

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Re: Investing Part of Home Down Payment Settings
« Reply #8 on: March 21, 2017, 05:15:10 PM »
How much are you saving per month. If you are living in SD and making a good salary saving a total of $80k should not even take 3 years. I think you should invest all the money now save for your emergency fund and re-evaluate in a year or so whether you need to start saving for the house.

Savings rate is okay, but not great. Still trying to tighten the budget but we are 1 income with a baby. My current budget sets us up to save around $3k per quarter or $12k per year. Could probably get that to $4.5k with a bit more tightening. But we could just as easily miss that target if we get complacent.

But in general your analysis isn't wrong, we would in theory be at or near the $80k mark in 3 - 4 years. But I also have to pay off a $6k student loan. And $10k on my car. So I am losing about 1 year to take care of those.

Granted the student loan is 2.3% and the car loan is 1.7% interest I still don't want any debts when I go house shopping.

I'm carrying a 5k student loan at 2.7% and I'm sitting on over ten times that in down-payment cash, plus my income brings that in monthly.  Do you really think a mortgage offer for a few hundred thousand will be affected by a tiny loan at a low interest rate?

RangerOne

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Re: Investing Part of Home Down Payment Settings
« Reply #9 on: March 21, 2017, 05:21:35 PM »
In your situation I might allocate:
1/3rd Vanguard Total Stock Market
2/3rd Vanguard Tax-Exempt Bond

People saving for houses in California are very likely in the 25% tax bracket or higher.  So a tax-exempt bond fund has better yield (2.2% no Fed tax) than a Total Bond Fund (2.5% becomes 1.9% after taxes).  If you buy Vanguard LifeStrategy, you wind up with 80% bonds and about half that money in Vanguard Total Bond.  Fine for a retirement account, but not as good in taxable.

You can't take too much risk, thus the 1/3rd stock.  You said you have some flexibility with the timing and even the amount of house you'll buy, which figures in here.  You'll want to sell the stock and bonds before your house search starts - you don't want the stock market ruining escrow.  An additional reason / aside: Vanguard refuses to wire money into an escrow account.  So months before your search, sell the stocks / tax-exempt bond fund and transfer that money to the bank account that will hold your down payment.

If you wind up having to spend a very specific amount at a very specific time, then I would go with all CDs for the entire down payment.  But with some flexibility, and half the down payment locked up in banks / CDs already, you could take some risk.


Radagast - Watch out for "imputed interest" on those zero coupon bonds.  You can owe taxes even in years when you receive $0.

I had considered the tax exempt municipal bonds a decent route to go if I did want to invest. However recently I had been comparing the basic total bonds to CD's and my money market neither of which are tax friendly either.

To be fair on 1 income with a kid and my wife I am generally able to keep all of our earnings out of the 25% bracket with all our tax advantage accounts. 401k, HSA and double standard deduction with 3 exemptions really knocks out most of the top end tax. I think I ducked the 25% bracket by $2k-$3k. Which put my top marginal exceedingly low for me at 21% state and fed.

However this year my pay increase exceed that gap by a good margin so I think my top marginal moving forward will hover around 33%-34% including Cali tax.

But I get your point if I cant stay under the 25% bracket my investment earnings taxed as income will get slammed for 33% with fed and state top marginal rates...

RangerOne

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Re: Investing Part of Home Down Payment Settings
« Reply #10 on: March 21, 2017, 05:23:40 PM »
How much are you saving per month. If you are living in SD and making a good salary saving a total of $80k should not even take 3 years. I think you should invest all the money now save for your emergency fund and re-evaluate in a year or so whether you need to start saving for the house.

Savings rate is okay, but not great. Still trying to tighten the budget but we are 1 income with a baby. My current budget sets us up to save around $3k per quarter or $12k per year. Could probably get that to $4.5k with a bit more tightening. But we could just as easily miss that target if we get complacent.

But in general your analysis isn't wrong, we would in theory be at or near the $80k mark in 3 - 4 years. But I also have to pay off a $6k student loan. And $10k on my car. So I am losing about 1 year to take care of those.

Granted the student loan is 2.3% and the car loan is 1.7% interest I still don't want any debts when I go house shopping.

I'm carrying a 5k student loan at 2.7% and I'm sitting on over ten times that in down-payment cash, plus my income brings that in monthly.  Do you really think a mortgage offer for a few hundred thousand will be affected by a tiny loan at a low interest rate?

No it would barely be a factor, I could ignore it I just hate paying $100 towards it a month instead of to my savings.

RangerOne

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Re: Investing Part of Home Down Payment Settings
« Reply #11 on: March 21, 2017, 05:31:23 PM »
Scortius, actually rethinking your point striving to pay down those loans ASAP could hurt me.

It kind of steals an extra $16k cash I could have a year sooner for a potential purchase, which I would deeply regret if the perfect buying time rolled along and I was $16k short on a sensible down payment....

I suppose given the super low interest it would be prudent to ignore those for now and focus on improving my savings rate through better budgeting.

From a loan perspective $16k is not even a factor next to a $300k home loan...

MustacheAndaHalf

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Re: Investing Part of Home Down Payment Settings
« Reply #12 on: March 22, 2017, 06:23:57 AM »
As long as we're heading down the road of debts to pay off vs not, you should also consider if paying off certain debts will hurt your credit score.  I think diversity of loan types might be a factor on credit score - but don't quote me.  It's worth researching a little, since your credit score will be extremely important in getting a home loan.

Consider investing vs loans as a choice: would you rather earn 2% or earn the stock market return?

A loan of $10,000 at 2% is like being drained of -2% while keeping $10,000 to invest.  Historically the stock market does much better than 2% (but there's no certainty about stock performance in a particular year), so investing has tended to be a better choice than paying off the loan.

There's an emotional component though - the feeling of being debt free might be worth more than the earnings on that money in the stock market.  But in terms of a profit decision, the stock market is likely to beat 2%, and so be a better place for money than paying off the loan.

And again, take a look at how paying off debts impacts credit score - not sure, but it's worth working on your credit score to increase it into the top range (760+?  800+?) before the house purchase.

Scortius

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Re: Investing Part of Home Down Payment Settings
« Reply #13 on: March 22, 2017, 09:55:19 AM »
Indeed.  I'm younger and a bit more aggressive, but I believe that once you graduate past Freshman year of MMM it's time to start looking at your debt as a possible source of leverage and power.  Your debt is an emergency... until it's not.  Then it's a tool to springboard you to faster wealth accumulation.  I will not be paying off my student loan any earlier than I have to.  I will not pay off my low interest mortgage any earlier than I have to.  Assuming the market returns 4% or better over the next 30 years, I win!

RangerOne

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Re: Investing Part of Home Down Payment Settings
« Reply #14 on: March 22, 2017, 12:27:43 PM »
As long as we're heading down the road of debts to pay off vs not, you should also consider if paying off certain debts will hurt your credit score.  I think diversity of loan types might be a factor on credit score - but don't quote me.  It's worth researching a little, since your credit score will be extremely important in getting a home loan.

Consider investing vs loans as a choice: would you rather earn 2% or earn the stock market return?

A loan of $10,000 at 2% is like being drained of -2% while keeping $10,000 to invest.  Historically the stock market does much better than 2% (but there's no certainty about stock performance in a particular year), so investing has tended to be a better choice than paying off the loan.

There's an emotional component though - the feeling of being debt free might be worth more than the earnings on that money in the stock market.  But in terms of a profit decision, the stock market is likely to beat 2%, and so be a better place for money than paying off the loan.

And again, take a look at how paying off debts impacts credit score - not sure, but it's worth working on your credit score to increase it into the top range (760+?  800+?) before the house purchase.

As far as I know with regards to credit score, the only component that really matters, with regard to open and closed loans, is length of credit history. If you close all your loans out you can wind up in a situation where you essentially have no credit history, which is bad and hurts one component of your score.

Generally the difference between someone with 800+ and mid to high 700's is length of credit history. A credit card is the easiest to keep for improving your age score since this is the only loan you can keep open indefinitely without inuring interest charges.

Most online credit score estimates falsely drop off your closed loans instantly from your credit history. Depending on the credit score system a closed loan in good standing can positively impact your score for 7-10 years. All my personal student loans for instance are now closed over the last 2 years. When I get a score from a company it tends to be 780ish. But my FICO always estimates at 750-760. The only difference is the credit score the companies pull has my student loans still factored into my credit history. While the FICO killed them off.

In general for credit it is prudent to keep a credit card with a utilization avg somewhere around 10 percent. That way you always have a credit history. Beyond that I wouldn't worry about artificially keeping loans open. By the time one drops off your record you could likely have built up a new age score based off a credit card.

As far as the difference between 760 and 800+ for getting a home. I can't imagine it is huge, but maybe it matters. Probably depends on the lender.

I think the emotional part of not having any small debt will eventually get the better of me. But in general the utility of having $16k in cash versus paying off low interest debt is much higher.

The car loan, I know its not very mustachian, is 1.75% interest. I could easily stick pay off money in a 5 year CD at 2.3% and do better than paying it off. The student loan is 2.6% so a bit worse but still somewhat trivial given it is a small amount of debt.

My plan as of now is to just sock away the case in the Capital one money market and I will reevaluate if I want to kill a loan as each year rolls buy.  As some have noted odds are I can find a more productive use for the cash than paying off the loan.

Jags4186

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Re: Investing Part of Home Down Payment Settings
« Reply #15 on: March 22, 2017, 04:47:14 PM »
My downpayment money is in Wellesley Income Fund.  Worst 1 year return is -9.84%.   Worst 3 year return is +1.94%.

PDXTabs

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Re: Investing Part of Home Down Payment Settings
« Reply #16 on: March 22, 2017, 05:22:36 PM »
The car loan, I know its not very mustachian, is 1.75% interest.

I think that MMM is a little weird about loans. The way I see it is that the CPI went up 2.7% between Feb 2016 and Feb 2017. Why would I pay off a loan that is at a rate lower than inflation any faster than I have to? You get to pay it off in the future with money that is worth less than today.

In the mean time you can take that money that you aren't using to pay off the loan and hopefully invest it in something that earns more than 2.7% (but perhaps not in this case where you are saving for a down payment).