Saving a downpayment when there isn't a strong push to purchase

[Lady SA]

Hi all, I'm looking for some advice regarding saving a downpayment if we don't have a strong incentive to purchase within the next few years, meaning we are on a long-ish term downpayment savings path. Where do you put the downpayment so it isn't languishing and losing money during that time?

As of now, Dh and I won't be in a position to buy for at least 4 years. We still have 2 years to pay off our student loans, then a few years of hardcore stashing with our high combined income before we have kids and I leave the workforce/"retire" to take care of them (in ~4.5 years), then DH will continue working to at least cover living expenses while our stash grows to our FI number. Then once kids are school age, DH and I might ramp back up and start working a bit to further supplement if needed or if we're bored; our FIRE plans are quite flexible.

Right now, we have a fantastic apartment, convenient location, right on a bus line and parks and biking/walking trails, good school district, and we have great landlords who are renting to us at super below market rate because they like us and wish to keep us in the apartment. It is spacious and we have room to grow in it. It's not perfect by any means but we are very content here and we want to stay for a while. The only thing that would be pushing us to buy a house is to eventually have a paid off house to live in, as that's a key part of our FI plans. But that doesn't necessitate buying RIGHT NOW, and since we are in such a good situation now, we can afford to wait and be very picky.

My thought is, since we don't have a "hard deadline" pushing us to get a house, saving a cash downpayment in traditional vehicles might not make sense since we could be talking a purchase anywhere from 4 years from now at the earliest to 8-10 years from now. I would hate to have that much liquid cash just sitting around for that long. I really, really want to avoid PMI, so I want to save up a 20% downpayment before jumping in. Decent houses around here are going for $300k+ and the market has been going up, that's just where the market is at. Who knows what it could be like 4-10 years from now.

Another thing to note, this house wouldn't be our forever home. Our original plan is to live in our current city for DH's and I's work and while our future kids are going to school, then after they leave the nest and we are very comfortably FI, DH and I design and build our dream forever home in smaller, cheaper, active town in our state.

Here are our options as I see them:

1) save cash in Credit Union savings account - get 2.5% interest on balance, its a really great deal.
Pros: 2.5% interest on cash is pretty good; keeps up with inflation decently. Easily accessible.
Cons: Only allowed a deposit of $500 per month, limited to saving just $6000/yr. only get 2.5% interest on the first 25k in the account, the remainder after that only gets .25%. Since we are talking a $60k+ downpayment in the fuzzy future, having it all hanging out in this account might not make much sense.

2) same as above but save the remainder after 25k in a CD or online savings account something.
Pros: can sock away more than $500 per month. can save more than 25k and get a bit more interest (~1%?) on the remainder after 25k... can't think of much else.
Cons: interest rates on CDs aren't super awesome when compared to the savings account. I'd hate to have cash just hanging out in a CD making peanuts when we don't have hard plans to purchase.

3) save 25k in Credit Union savings account, then pull remainder of downpayment from stash (brokerage account). Would only do this when the market is up and found something that we liked.
Pros: making our dollars work for us, not having a big chunk of money sitting around for an unknown period of time, half our downpayment is liquid so market downturns won't be quite so stressful.
Cons: tax implications of selling off that much stock? disappointment of having to pass on a good house if the market isn't right. Difficulty getting money out? I've never withdrawn money from a brokerage account so I actually don't know how easy/difficult it is to get at it.

4) don't save up 20% to avoid PMI, instead go for maybe 10% or whatever cash we have saved up. Our earliest timeline to do this is still 3-4 years away, however. So would take the ~25k from the credit union account for this purpose.
Pros: purchase earlier, possibly lock in a lower interest rate? No need to scramble around trying to pull together a bunch of funds from different places to make the downpayment.
Cons: PMI!! Don't NEED to buy a house at this point. I would rather wait to buy a house we can afford than jump in prematurely because of fear of interest rates or something. I haven't figured out a way to compare between avoiding PMI at a possibly higher rate vs having a bit of PMI at a potentially lower rate because math isn't my strong suit, so I actually have no idea if this way would actually put us ahead or not. My gut says probably not.

5) skip buying a house in current city altogether, wait to buy a house until after we are close to being FI, and just get our forever home. If we went this route, timing would be about 10 years out from now. We would move there before kids leave the nest instead of after--we want to do my best to keep the kids in one school district (after ~1st grade we don't want to move them from their friends), and neither of us want to be renting for 25 more years. So that means moving out there a bit earlier than planned. We would be close to FI at this point but wouldn't have reached our number yet, which makes me a bit nervous.
Pros: Stay in current apartment until kids are school aged. Get our dream house and be able to live in it 20 years longer than our original plan. Land/housing/general expenses are cheaper there than in our current city. Still a good school district up in new town.
Cons: 10 years in current city is a long time to rent and who knows what could happen--its very unlikely, but our landlords could sell and new landlords significantly raise the rent or something. That much uncertainty makes me a bit nervous, but not enough to discount this option. Also, our FI plan depends on DH having at least a part time job after we have kids to cover expenses and allow our stash to grow unmolested or even supplement it further if he gets more money than required. That is easy to do in our current city, DH's job loves him and would let him downgrade to fewer hours. New small town would be more difficult, there isn't much of a market for DH's skill set there and would be more difficult to get a position that is a good fit for our goals. Moving to new small town in 10 years, we think we will be just baarreellyy FI, which is a bit too squishy for my tastes. Also, "wasted" rent for 10+ years, a few more years than needed.


I think I might just be too close to this so I can't figure out which is best if we are waiting an unknown amount of time to buy. Keep the downpayment as liquid as we can? Or illiquid and pull it out when needed? 20% down, or less? Or just ignore it until we decide to move to our forever town? lol

Does anyone have any advice or insight on what they would do in this situation, or if you found yourself in a similar situation, what did you do? What have I missed? Or alternative ideas that I haven't thought of yet? Thanks!

[sokoloff]

That far out and that much flexibility, I'd be investing the "savings" in the stock market (VTSAX).

Among your choices, I'd be leaning towards 5, as I don't like the intermediate house plan very much and your rental situation is good (very good actually).

[daverobev]

Just put it into a conservative stock/bond allocation (60/40, say).

Not sure why you think you need a paid off house to FIRE. You really don't. There is a lot of expense that goes with owning.

I'd maybe keep the $25k you get a 'decent' return on as cash, and then stocks/bonds. And not worry about things overmuch.

[wordnerd]

That far out and that much flexibility, I'd be investing the "savings" in the stock market (VTSAX).

Among your choices, I'd be leaning towards 5, as I don't like the intermediate house plan very much and your rental situation is good (very good actually).

+1

[frugaliknowit]

I would open a balanced fund account for the specific purpose of a house downpayment.  An example of a balanced fund to use is:  https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0103.  This is what I use for a possible car purchase.

The beauty of handling it this way is:

1.  When the market crashes (not if, when...!), this fund will likely fall about ~20% instead of 50%.
2.  Should earn 6-8% per year.
3.  It doesn't matter when/if you buy a house; you can just leave it alone.

[ysette9]

We were in a similar situation. We originally had our money in very conservative investments (short-term bond funds) and missed out on some spectacular gains in the stock market during that time. When we reevaluated and decided to keep renting for longer, we said "screw it's to the bond fund and dunked it all in VTSAX.

Was that risky? Yes. Could it have gone south on us? Yes. Our reasoning though was, like you, we had a decent rental in a location we liked and nothing was pushing us to move by a certain deadline. That meant that if the stock market took a temporary dump we would just push our our plans to buy a house. This isn't the right move for everyone, but it worked for us.

[Goldielocks]

We were in a similar situation. We originally had our money in very conservative investments (short-term bond funds) and missed out on some spectacular gains in the stock market during that time. When we reevaluated and decided to keep renting for longer, we said "screw it's to the bond fund and dunked it all in VTSAX.

Was that risky? Yes. Could it have gone south on us? Yes. Our reasoning though was, like you, we had a decent rental in a location we liked and nothing was pushing us to move by a certain deadline. That meant that if the stock market took a temporary dump we would just push our our plans to buy a house. This isn't the right move for everyone, but it worked for us.

It is risky...   we got burned doing this, and could not hold out for more than 2 years after the crash because home prices also fell and LL called our lease, so we were forced to move somewhere, and wanted stability for the kids.

[frugaliknowit]

We were in a similar situation. We originally had our money in very conservative investments (short-term bond funds) and missed out on some spectacular gains in the stock market during that time. When we reevaluated and decided to keep renting for longer, we said "screw it's to the bond fund and dunked it all in VTSAX.

Was that risky? Yes. Could it have gone south on us? Yes. Our reasoning though was, like you, we had a decent rental in a location we liked and nothing was pushing us to move by a certain deadline. That meant that if the stock market took a temporary dump we would just push our our plans to buy a house. This isn't the right move for everyone, but it worked for us.

This is exactly why I am convinced a balanced fund is the way to go...this is potentially your home equity; don't be greedy:)

[Lady SA]

Just put it into a conservative stock/bond allocation (60/40, say).

Not sure why you think you need a paid off house to FIRE. You really don't. There is a lot of expense that goes with owning.

I'd maybe keep the $25k you get a 'decent' return on as cash, and then stocks/bonds. And not worry about things overmuch.

Thanks daverobv. I guess the thought behind having a paid off house was no mortgage in our budget (far in the future), which when we are older would significantly decrease our spending and when we are too old to be independent, we could sell and have all equity available to set us up in a nice senior community. I suppose this isn't SUPER important to have it paid off, but my thinking was get a 30 yr mortgage, then by the time we are 60-65, the house would be paid off and pressures on our budget are less. Am I not thinking about this correctly? To be fair, I've never purchased a house before so I'm not super familiar with the ins and outs of the financials involved beyond a very high level understanding from lurking around here and poking around on my own a bit, so I bet I'm missing something.

That far out and that much flexibility, I'd be investing the "savings" in the stock market (VTSAX).

Among your choices, I'd be leaning towards 5, as I don't like the intermediate house plan very much and your rental situation is good (very good actually).

Thanks! I agree, we are very happy where we are and I think if we can keep this up for as long as possible I'd love to stay here. However, playing around with the rent vs buy calculator, within about 5 or 6 years of very modest rent increases (at the same rate our landlords have raised the rent in the past), that will tip the scales in favor of buying, but barely. Rents in our city are pretty competitive as there is a slight housing shortage, so while we are getting our apartment at well below market rate, it isn't ridiculously cheap by any means.
So my thought is, once the scales tip to favor buying (slightly), that is the time we can start looking, but since we are quite happy with the physical apartment, the money we are paying is worth staying in while we be picky about our next housing situation. Do you have any other thoughts or suggestions? Or things that I'm missing?

I would open a balanced fund account for the specific purpose of a house downpayment.  An example of a balanced fund to use is:  https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0103.  This is what I use for a possible car purchase.

The beauty of handling it this way is:

1.  When the market crashes (not if, when...!), this fund will likely fall about ~20% instead of 50%.
2.  Should earn 6-8% per year.
3.  It doesn't matter when/if you buy a house; you can just leave it alone.

huh! I had no idea this existed! Thank you frugaliknowit! I'll have to research and look more into this, I'm quite intrigued and I think this might suit our needs well. How long have you had this fund?

---------------------------------------------

I talked more with DH this weekend. He strongly feels that staying in our current city would be best for him to get the type of super flexible job that we both want him to have while our children are under 10. And because we are both unwilling to uproot them after they start school, we are both leaning towards staying in current city. Both of us value him having that type of job (to maintain relevancy in his field) and spending more time with our family over living in new town. Current city isn't HCOL, but isn't super LCOL either, but moving to new town would severely limit our job options and FIRE flexibility to pick up additional supplemental work. He doubts that he could find a job like we are hoping up there and then ask to go down to part-time instead, its the nature of his industry, but he knows he can do it here. We can still be very picky about our housing here in current city and wait for something we are happy with to come along, or possibly get land a bit out of town to build that dream home here, instead of there.

With that in mind, we are leaning toward conservatively investing part of our downpayment, and keeping a chunk of it in that high interest savings account for liquidity, then looking for something in around 5-6 years (when the balance tips to favor buying). That balanced fund is intriguing, but I could also set up some sort of conservative allocation too. I don't want to be too greedy, but I want to balance my cash's safety with usefulness. I'm glad I reached out to get opinions and ideas; I like to think far ahead to set a goal or idea, and then lay the groundwork to reach it. so even though this is pretty far in the future, I like to have a general plan in place to most efficiently reach it. I appreciate everyone's ideas!

[daverobev]

Just put it into a conservative stock/bond allocation (60/40, say).

Not sure why you think you need a paid off house to FIRE. You really don't. There is a lot of expense that goes with owning.

I'd maybe keep the $25k you get a 'decent' return on as cash, and then stocks/bonds. And not worry about things overmuch.

Thanks daverobv. I guess the thought behind having a paid off house was no mortgage in our budget (far in the future), which when we are older would significantly decrease our spending and when we are too old to be independent, we could sell and have all equity available to set us up in a nice senior community. I suppose this isn't SUPER important to have it paid off, but my thinking was get a 30 yr mortgage, then by the time we are 60-65, the house would be paid off and pressures on our budget are less. Am I not thinking about this correctly? To be fair, I've never purchased a house before so I'm not super familiar with the ins and outs of the financials involved beyond a very high level understanding from lurking around here and poking around on my own a bit, so I bet I'm missing something.

Ah sorry I meant the opposite - why buy at all? You can just rent. Invest instead; it should come out at least equal.

Transaction costs in NA are crazy high (though I don't think you're planning on selling); houses are single, immobile, indivisible assets. PITA, IMHO (Ours is up for sale now, we're thinking of renting... if it sells. If not, oh well, we'll stay put).