Author Topic: Where to put down payment savings  (Read 3283 times)

ysette9

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Where to put down payment savings
« on: July 02, 2014, 08:20:36 PM »
The natural answer to the question of "where should I put my down payment savings?" is some form of "cash", since it is short-term savings for a short-term goal, and most financial advisers say not to put up with the risk of losing money when you don't have the time frame to recover from it. I am totally on board with that, but...

We will be purchasing a house (probably with a granny unit or a duplex/triplex/something) in the next year+-ish. Time frame is fuzzy because there is nothing pressing about our current situation to make us move. We are currently saving, watching the market, and educating ourselves. The expected purchase price is probably in the $1 - 1.3M range, though that too is fuzzy because we are still in the "educational" mode.

So far down payment savings is approximately $215K, in a high-interest (hah!) savings account. My current goal is to get that to $220K and then start funneling our savings into a stock market mutual fund.

Here is my real question: we will likely be selling our townhouse later this year (currently rented out) and I expect to use the proceeds to put towards our eventual house purchase. We may net $100-150K from the townhouse sale. Would you recommend also putting that into the savings account? I would like to have a large down payment and also have funds for potential remodeling. Savings seems the safest, but somehow it also feels absurd to have that much cash sitting around doing nothing.

I appreciate your perspectives.

FrugalSpendthrift

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Re: Where to put down payment savings
« Reply #1 on: July 02, 2014, 09:08:25 PM »
It's not doing nothing if it is preparing to buy a house.

surfhb

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Re: Where to put down payment savings
« Reply #2 on: July 02, 2014, 10:18:14 PM »
It's not doing nothing if it is preparing to buy a house.

Exactly.   It goes into any old saving account at your local bank.   

ysette9

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Re: Where to put down payment savings
« Reply #3 on: July 03, 2014, 11:41:43 AM »
It's not doing nothing if it is preparing to buy a house.

Good point.

DMoney

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Re: Where to put down payment savings
« Reply #4 on: July 03, 2014, 11:52:03 AM »
We're in a similar situation.  Except we're not totally sure we'll buy in the next year or so.  We're open to it.   Have enough for a big down payment, but just kind of waiting for the right house to become available.  In the mean time a ridiculous amount of money is "doing nothing".

I'd love to hear some suggestions other than just "cash".
« Last Edit: July 03, 2014, 12:05:41 PM by DMoney »

birdman2003

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Re: Where to put down payment savings
« Reply #5 on: July 03, 2014, 12:58:47 PM »
We're in a similar situation.  Except we're not totally sure we'll buy in the next year or so.  We're open to it.   Have enough for a big down payment, but just kind of waiting for the right house to become available.  In the mean time a ridiculous amount of money is "doing nothing".

I'd love to hear some suggestions other than just "cash".

If you need it in a year, and you put it into something other than "just cash" it could swing away from you.  Then you have to wait several more years for it to recover.

Like FrugalSpendthrift said, it's not "doing nothing" if it is preparing you to buy a house.

adamwoods137

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Re: Where to put down payment savings
« Reply #6 on: July 03, 2014, 03:07:38 PM »
The fundamental financial question is supposed to be "do I need this money soon?"  It does not apply in your situation, because you don't need exactly $370K.  The admonishment to keep the money in cash applies to people who for whatever reason need the principle value to be stable.  For example, if you invested all of the money in SPY, the fear is that the market would crash and you'd have to sell a great deal of SPY for not very much money. However, since you don't need exactly $370K you can allocate the money you don't need to any sort of investment you think is prudent.  Ideally you'd want to put the needed money in an asset that was 100% correlated with the value of the home you will end up buying.  If you expect the price of this home to be relatively stable (ie. no moves greater than 10%) cash is good enough, and it is why people suggest keeping your money in it. The correct way to treat the problem is by asking yourself this question: "If this transaction had already occurred, what should the allocation of my money be."  After the house is bought you will be long 1 to 1.3 million in real estate and have a mortgage that is a significant fraction of a million dollars.  You can treat the mortgage as being short bonds, with the benefit that the principal value can never go up.  So the real question is would you be willing to short bonds in order to go long on some other asset class?

Without knowing exactly what your financial situation is I would suspect that the best option is to put an estimated 20% down payment in cash in a savings account, CD or something with a similar level of safety.  Take the rest of the money and invest it according to your long term asset allocation strategy assuming your expected return on this strategy exceeds 4% and assuming that if things go to pot in the stock market/bond market etc, you'll be able to leave the money in there.  I realize this sounds like market timing, but the principle at work is not that you're trying to avoid "selling low" but rather that you realize that the assets you purchase have intrinsic value and you don't want to be in a position to sell your assets at a discount to that value because you need the money.  You should have a plan that doesn't involve raiding these assets if for example you lose your job and still have to make this new mortgage payment.  If you can support your fixed payments in some fashion even if you and your spouse are fired, then you can afford to be much riskier with the excess cash.  This all holds even if you plan on using that excess money to pay off the mortgage debt if you can make two assumptions: first you're willing to hold your assets if the best price you can get from them is below your estimate of their intrinsic value, and second you believe the expected return on these assets is greater than the expected cost of the mortgage debt.