Help Picking a Place to Keep a Lump Sum of Cash

[RangerOne]

So I am trying to decide what course of action to recommend to my mother in law. She has a lump sum of about $50k set aside right now in cash that she is keeping to help me and my wife buy a house.

I have told her the the soonest we would likely be in shape to consider this option would probably be 3 years. Obviously we want that money to gain some interest but we really probably don't want to risk losing much if any of the money. Especially because I good time to buy a house may be in the middle of a downturn.

Right now I am leaning towards convincing her to place it in a 3 year CD which could hopefully get somewhere close to 2% APY.

The contention is she had a MLCD from Unionbank for another account over the last 4 years. It is set against the S&P 500 quarterly with a 2.5% - 3.5% cap on gains and no cap on losses. At the end of the term they add up all 12-16 quarterly ups and downs and that sum is the net gain you get on your initial investment. It the sum ends up being negative you get a flat 2% for 3-4 eyars, which is a sub 1% APY... Also there is an upfront fee of 2.5%-7% for each MLCD purchased.

It seems like in the majority of cases this will work out to do worse than a standard CD. More costs, and highly like that 1 or 2 really big index drops will kill your final percentage. So would any of you still recommend the normal CD over MLCDs?

Should I consider looking into a moderate index investment with Vanguard we should consider if we decide we are willing to weather some potential loss.

[Rubic]

Three years is too short to be investing money in the stock market.  A 2% CD should keep up with inflation long enough for you to purchase your house, so it's probably the best vehicle for your intended purpose.

[felizcortez]

Why don't you sign up for a CapitalOne360 account - you can get a $500 bonus in 90 days if you deposit $50k.  It pays .75% after that, but you could switch it to Ally at ~1% or put it in a CD afterwards if you wanted to lock in 2%.  If you PM me your email address I can send you a referral link.  You also want to look at liquidity, if you lock this into a CD you may want access sooner, but will have to pay penalties if you withdraw. 

[MustacheAndaHalf]

A down payment in the stock market can lose 10% right as you bid on a house.  Don't risk it, and use a certificate of deposit instead.

You might be surprised when I suggest a 5 year CD for a need only 3 years away... but look:
online savings, 1% rates
3 year CDs, 1.5% - 1.6% rates (look for 6 month penalty or less)
5 year CDs, 2.2% rate (look for 6 month penalty or less)

What happens after 3 years, with a 3-year CD versus a 5-year CD?
(5 year) 2.2% ^^ 3 - 1.1% = roughly 5.6% return
(3 year) 1.6% ^^ 3 = roughly 4.9% return
Even with the -1.1% penalty, the 5 year CD is earning more.  So there's a flexible answer to where to keep the money: in a 5 year CD that features a 6 month withdrawal penalty.

Ally is really good at having reasonable withdrawal penalties, and Capital One 360 has better rates and a reasonable withdrawal penalty.  Overall I'd suggest a CD and taking the withdrawal penalty because you plan to keep the money at least 2 years, and maybe longer than 3 years.

[RangerOne]

Thanks for all the suggestions. I will look into the 5 year CD. That looks promising. Its probably high time I moved some of my emergency fund into an ally or capital one account anyway to get a better savings yield.

I still have to kind of persuade her that a good CD is probably better than an MLCD as well. I suspect the terms work out to where the MLCD is a much better deal for the bank than for the buyer... I just want some secondary opinions on the subject.

I had never heard of an MLCD until she showed that to me.