Author Topic: Would I Bonds be a good place to save for a house downpayment?  (Read 872 times)

englishteacheralex

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Would I Bonds be a good place to save for a house downpayment?
« on: November 17, 2021, 02:53:51 PM »
Somebody just posted about I bonds being at 7.1% for the next six months. We have about $70k in cash that we are saving for a down payment. Since we're in an area where the median home price is $1m, it's going to be a long slog. We're looking at a time horizon of about two years, potentially (we have a good bit of equity in our current home).

Would I bonds be a decent short term place to park that money? Right now it's just in a money market account earning .5%.

PDXTabs

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #1 on: November 17, 2021, 03:00:00 PM »
I say yes, keeping in mind that you can't get a single penny for 12 months and that it is hard to buy more than $10k/person/year.

MustacheAndaHalf

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #2 on: November 17, 2021, 08:33:02 PM »
"Minimum term of ownership: 1 year"
"Early redemption penalties:
Before 5 years, forfeit interest from the previous 3 months"
https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

Losing 3 months interest means the last year will earn 5.3%, but that's much better than 2% for long-term treasury bonds.
https://investor.vanguard.com/etf/profile/EDV
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

harvestbook

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #3 on: November 18, 2021, 06:59:23 AM »

Would I bonds be a decent short term place to park that money? Right now it's just in a money market account earning .5%.

For money needed in two years, it doesn't sound worth it. You and spouse can buy $20k, at 7 percent you would earn $70 for six months and then you are at risk of a rate change since it's tied to inflation. Then count in the loss of three months' interest at the end of year two when you pull the money. Even if rates stayed 7 percent, which in my view is unlikely, and you did it again next year, you probably will only make a couple hundred bucks for your trouble and the tying up of your funds. I'd rather just put it into a medium-term tax-exempt bond fund and make my 2-3 ish percent. (Vanguard tax-exempt fund showing around 6 percent return over 2 years).

IBonds seem like a decent long-term diversification if you can build it up over a period of years, but it doesn't seem as good for a short-term plan because of all the conditions and uncertainty of ever-changing rates.

Of course, some would argue that if inflation is expected, then buying a house is a great way to "gain" real dollars by having a locked-in mortgage. If you believe inflation is going to stay this high, maybe I bonds are worth it. Personally I don't like choices where I have to guess right, especially for something as important as a house.
« Last Edit: November 18, 2021, 07:09:22 AM by harvestbook »

YttriumNitrate

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #4 on: November 18, 2021, 07:11:56 AM »
For money needed in two years, it doesn't sound worth it. You and spouse can buy $20k, at 7 percent you would earn $70 for six months and then you are at risk of a rate change since it's tied to inflation. ... you probably will only make a couple hundred bucks for your trouble and the tying up of your funds.
$20k at 7% for six months yields $700, not $70.

FLBiker

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #5 on: November 18, 2021, 09:18:11 AM »
I'm doing this (sort of).  I'm planning to pay off (or at least dramatically reduce) our mortgage in a little under 4 years, and I'm putting that money into I-Bonds (up to the limit).  It's under the time horizon that I'm comfortable putting it into index funds, and high interest savings accounts are pretty abysmal right now.

dandarc

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #6 on: November 18, 2021, 09:20:22 AM »
For money needed in two years, it doesn't sound worth it. You and spouse can buy $20k, at 7 percent you would earn $70 for six months and then you are at risk of a rate change since it's tied to inflation. ... you probably will only make a couple hundred bucks for your trouble and the tying up of your funds.
$20k at 7% for six months yields $700, not $70.
This is a good illustration of what keeps the whole financial advising racket going strong year after year.

Gagnante

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #7 on: November 28, 2021, 03:49:36 PM »
Since she has two kids, could she not also buy an additional $20K under the kids' SSNs?  So 40K invested at 7% (at least for the first six months...)?

seattlecyclone

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #8 on: November 28, 2021, 04:20:06 PM »
Seems like a reasonable option if you can't envision a scenario where you'd need to get your money back within 12 months. Good luck getting a similar risk-free rate elsewhere.

2sk22

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #9 on: November 30, 2021, 08:58:00 AM »
I was listening to a recent episode of the Animal spirits podcast where they mentioned an interesting ETF aimed precisely at people like the OP:

https://www.lifegoalinvestments.com/hom

Quote
LifeGoal Home Down Payment Investment ETF (ticker: HOM) is a low cost, diversified ETF built to show people exactly what dollars they have set aside for a down payment for an upcoming home purchase- all while having those dollars professionally invested.

Seems like an intriguing idea - the only thing is that this is a relatively illiquid ETF

frugalnacho

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #10 on: November 30, 2021, 09:29:26 AM »
Why is everyone saying $20k?  You can both buy $10k each right now, and can do it again come January giving you $40k.  That still fits in the time horizon, and is only a month away.  You could potentially purchase another $5k when you complete your taxes.

You can purchase bonds for children, but I don't see how that helps because the bond will be owned by the child and not the OP so I don't think they can just cash out their children's bonds to use for a house. 

dandarc

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #11 on: November 30, 2021, 09:30:37 AM »
I was listening to a recent episode of the Animal spirits podcast where they mentioned an interesting ETF aimed precisely at people like the OP:

https://www.lifegoalinvestments.com/hom

Quote
LifeGoal Home Down Payment Investment ETF (ticker: HOM) is a low cost, diversified ETF built to show people exactly what dollars they have set aside for a down payment for an upcoming home purchase- all while having those dollars professionally invested.

Seems like an intriguing idea - the only thing is that this is a relatively illiquid ETF
Only thing is that it is illiquid? More things off the top of my head:

1. Actively managed
2. High ER (0.44% only due to a contractual arrangement - actual ER is almost double that, and the contract only runs through 9/30/2022)
3. Over-weighted to housing-related stocks like Lowe's, Home Depot, Williams-Sonoma - why?
4. Hasn't even been operating for a full quarter yet


I question whether 25% stocks / 75% bonds is really appropriate for the stated purpose, and even if it is what you want to do for saving for a house down payment, why this fund which seems like a vehicle to make money for the fund managers and not much else? If you really want a "mostly safe, but some growth" portfolio, Vanguard LifeStrategy Income or a similar alternative from an established provider seems like a better bet to me.

englishteacheralex

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Re: Would I Bonds be a good place to save for a house downpayment?
« Reply #12 on: November 30, 2021, 12:08:48 PM »
Update: we're actively looking for houses right now and don't want to tie money up in anything. I talked to my husband about Ibonds but really we just need as much cash on hand as possible. Thanks for all the weigh-ins, though.