Author Topic: Saving up for mortgage downpayment - Where to keep that cash?  (Read 4769 times)

ImproveEveryday

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For a long time I have daydreamed about saving up $200k for a downpayment on a house.  In my town, any decent house that isn't a big commute away from work and schools is going to be very, very expensive. Like close to a million.

So lets say I want to save up for that huge downpayment, where do savvy Mustachians put this money? Does it go into a high-interest savings account (hah, oxymoron) and just sit there, not working for you at all? Or should it get invested into something big and safe like a Vanguard stock index fund to grow, then it all gets withdrawn when you need the cash?

Thanks for your time


neo von retorch

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #1 on: March 24, 2015, 08:57:56 AM »
http://forum.mrmoneymustache.com/ask-a-mustachian/where-should-i-save-my-house-down-payment/
http://forum.mrmoneymustache.com/ask-a-mustachian/where-to-save-downpayment-money-for-a-house/

Definitely some discussion of this before. The short answer is "yes put it in savings." The stock market is not guaranteed. It's a good long-term investment (though even that isn't truly guaranteed.)

There are some 0.95-1.05% savings accounts (Ally, Barclay Dream, GE Capital, SmartyPig) that will reduce loss of spending power to inflation.

Unless you're not buying a house in the next seven (ten?) years, it's not wise to invest it in equities. If for some reason, some event triggers a correction, the value of your invested money could drop 10-20% and greatly reduce your spending power.

NorCal

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #2 on: March 24, 2015, 10:55:57 AM »
I'm saving for a similar downpayment.  I put most of it in a CD that matures around when I expect to buy.

I put a portion of it in a minimum-variance portfolio I created myself.  I only recommend this portion of the portfolio for those solid with statistics skills and knowledge of the heavier financial math (correlations, covariance, linear programming, etc.)

Retired To Win

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #3 on: March 24, 2015, 02:30:27 PM »
Boy, I hate to sound like a smart aleck.  BUT...

I really think you are asking the wrong question.  A million bucks to buy a house?  Two hundred grand for a down payment?  Please rethink your basic situation.

Ask yourself some zero-based questions.  Like what more reasonable cost of living locations would I like to live in...  could I get a job in?  Would I be better off with a lower income if I could buy a house for a lot less?  (Heh, like 80% less!!!).  WHY am I assuming that I have to stay in this super-expensive location I am in right now?

Good luck.

ShoulderThingThatGoesUp

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #4 on: March 24, 2015, 02:36:23 PM »
$200k will buy you a nice house in much of the country. Maybe there are good reasons moving isn't on the table, but consider it.

charis

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #5 on: March 24, 2015, 02:38:27 PM »
Agreed.  I have friends, well-paid corporate execs, who live in an area where a million dollars buys you a fixer upper house.  They rented for years and then purchased a condo after their first child was born.

You should explore other options.

nereo

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #6 on: March 24, 2015, 03:01:15 PM »
For a long time I have daydreamed about saving up $200k for a downpayment on a house.  In my town, any decent house that isn't a big commute away from work and schools is going to be very, very expensive. Like close to a million.

So lets say I want to save up for that huge downpayment, where do savvy Mustachians put this money?
IMO it all comes down to your time-frame, and how concrete that time-frame is.  If you are thinking "one-day, maybe, several years away" I'd definitely put all of your savings into a low-cost index fund.  If in several years the market dips - meh - you wait for it to recover, or decide not to buy at all.
However, if you are planning on definitely making a purchase with a couple of years, then your #1 concern is protecting principle and a savings account may be your best bet.

To use history as a guide:  For one year periods, the real-adjusted SP500 has finished positive about 2/3 or the time, but with a range from -38% to +53%
For 5 year periods, 80% of the time the market has finished positive (range of annualized returns: -13.5% to +23.5%)
For 10 year periods, you win 89% of the time (annualized range: -4% to 18.3%).
For 20 year periods, it has always been positive.

For any period much longer than a year the odds favor putting it in the market, but whether that's the right decision depends on if you must take it out at an exact point, or if you can wait until it's right for you.

Gone Fishing

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Re: Saving up for mortgage downpayment - Where to keep that cash?
« Reply #7 on: March 27, 2015, 02:46:56 PM »
I would need a post tax annual income of at least $250k to consider buying a $1,000k house and taking on a $800k mortgage.  With that high of an income I could probably manage a 80%+ post tax savings rate which would give me enough for the down payment in a year.  So the answer that case would be in a 1%+- savings account.

Just curious, how much would it cost to rent a comparable house?   
« Last Edit: March 27, 2015, 02:48:51 PM by So Close »