Author Topic: Best way to save up for a house?  (Read 4061 times)

desertCyclist

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Best way to save up for a house?
« on: March 23, 2015, 07:12:12 PM »
I'm hoping to purchase a house in the 12-20 months. I'm currently putting my money into a savings account that earns 1% APY - should I put my money elsewhere? At this rate, I will have enough to put a 20% DP on a 180K house (I am looking for homes in the 160-200K range) in 12 months or less and still have a 5K safety net.

Thanks!!

waltworks

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Re: Best way to save up for a house?
« Reply #1 on: March 24, 2015, 08:12:54 AM »
This gets asked about twice a week. Anything but a savings account is a bad idea in that short of a timeframe - there is way too much risk involved with anything that might yield more.

The only exception I can think of would be a scenario where you'll sell your existing home to buy another house, where you could pay down your existing mortgage (presumably at some >1% rate) instead of doing the savings account.

-W

I'm hoping to purchase a house in the 12-20 months. I'm currently putting my money into a savings account that earns 1% APY - should I put my money elsewhere? At this rate, I will have enough to put a 20% DP on a 180K house (I am looking for homes in the 160-200K range) in 12 months or less and still have a 5K safety net.

Thanks!!

shotgunwilly

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Re: Best way to save up for a house?
« Reply #2 on: March 24, 2015, 10:25:35 AM »
This gets asked about twice a week. Anything but a savings account is a bad idea in that short of a timeframe - there is way too much risk involved with anything that might yield more.

The only exception I can think of would be a scenario where you'll sell your existing home to buy another house, where you could pay down your existing mortgage (presumably at some >1% rate) instead of doing the savings account.

-W

Even then, you're gambling that the real estate market won't take a hit.

Just keep putting your money in the savings account.

Sid Hoffman

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Re: Best way to save up for a house?
« Reply #3 on: March 24, 2015, 03:42:38 PM »
Even then, you're gambling that the real estate market won't take a hit.

Just keep putting your money in the savings account.

How do you figure?  I'm having trouble visualizing the math which would support your statement.

math-ya

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Re: Best way to save up for a house?
« Reply #4 on: March 25, 2015, 05:38:12 AM »
Savings accounts rates are so low right now. You could go to your local credit union, they usually give better rates, and are often better banks in many ways than national chains.
You could also purchase CDs, which provide higher yields and better rates while still remaining liquid.
Since you don't know exactly when you will need the money cuz you don't know when your dream house will come on the market, you could get a longer term cd that has a lower penalty for early withdrawal.

RWD

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Re: Best way to save up for a house?
« Reply #5 on: March 25, 2015, 11:27:37 AM »
Even then, you're gambling that the real estate market won't take a hit.

Just keep putting your money in the savings account.

How do you figure?  I'm having trouble visualizing the math which would support your statement.

The only thing I can think of is that the market could change such that it would be difficult to sell your house. But the amount of money you have available for a down payment if the house does sell should be the same whether you pay down your mortgage with the spare cash or keep it in savings.

jmusic

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Re: Best way to save up for a house?
« Reply #6 on: March 25, 2015, 12:06:03 PM »
Even then, you're gambling that the real estate market won't take a hit.

Just keep putting your money in the savings account.

How do you figure?  I'm having trouble visualizing the math which would support your statement.

The only thing I can think of is that the market could change such that it would be difficult to sell your house. But the amount of money you have available for a down payment if the house does sell should be the same whether you pay down your mortgage with the spare cash or keep it in savings.

The only thing that causes difficulty in selling is a high price.  If the market gets softer, that just means that the actual clearing prices are going down and then sellers get reluctant...

lakemom

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Re: Best way to save up for a house?
« Reply #7 on: March 25, 2015, 12:17:56 PM »
Even then, you're gambling that the real estate market won't take a hit.

Just keep putting your money in the savings account.

How do you figure?  I'm having trouble visualizing the math which would support your statement.

The only thing I can think of is that the market could change such that it would be difficult to sell your house. But the amount of money you have available for a down payment if the house does sell should be the same whether you pay down your mortgage with the spare cash or keep it in savings.

Well, NO, if the market tanks your house is worth less than it was before thus reducing your net from a sale.  So in the example if I'm putting 1k per month in savings at the end of the year I have 12k PLUS the equity in my home say a 200k house with 50k in equity ( and a 150k mortgage) for a new down payment of 62k (ignoring commissions for easy math).  BUT if I put 12k onto my mortgage reducing it by 12k (150-12= 138k left on mortgage) but the week I find my new house the biggest employer in the county announces a 400 person layoff (about 15% of the county's employed workforce) and the housing market tanks by 30% I now only have 2k to put down on a new house (again ignoring commissions)  200k-60k= 140k-138k=2k.  And before you say this is crazy the layoff happened in my town a few years ago just as the housing was starting to come back after the 2008 crash.  I knew a lot of people who either couldn't sell or sold at a loss or very small gain during the ensuing 2 years that it took the housing market to rebound, again.  I also know a lot who bought their first home as a bargain (thinking long term) during this timeframe.

RWD

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Re: Best way to save up for a house?
« Reply #8 on: March 25, 2015, 01:30:31 PM »
Even then, you're gambling that the real estate market won't take a hit.

Just keep putting your money in the savings account.

How do you figure?  I'm having trouble visualizing the math which would support your statement.

The only thing I can think of is that the market could change such that it would be difficult to sell your house. But the amount of money you have available for a down payment if the house does sell should be the same whether you pay down your mortgage with the spare cash or keep it in savings.

Well, NO, if the market tanks your house is worth less than it was before thus reducing your net from a sale.  So in the example if I'm putting 1k per month in savings at the end of the year I have 12k PLUS the equity in my home say a 200k house with 50k in equity ( and a 150k mortgage) for a new down payment of 62k (ignoring commissions for easy math).  BUT if I put 12k onto my mortgage reducing it by 12k (150-12= 138k left on mortgage) but the week I find my new house the biggest employer in the county announces a 400 person layoff (about 15% of the county's employed workforce) and the housing market tanks by 30% I now only have 2k to put down on a new house (again ignoring commissions)  200k-60k= 140k-138k=2k.  And before you say this is crazy the layoff happened in my town a few years ago just as the housing was starting to come back after the 2008 crash.  I knew a lot of people who either couldn't sell or sold at a loss or very small gain during the ensuing 2 years that it took the housing market to rebound, again.  I also know a lot who bought their first home as a bargain (thinking long term) during this timeframe.

Paying down your mortgage doesn't cause the housing market to crash... Here are your two scenarios:

#1)
$12k in savings
$140k house (after 30% drop)
$150k mortgage
TOTAL = $2k

#2)
$0 in savings
$140k house
$138k mortgage
TOTAL = $2k

These two scenarios are the same, assuming you are going to sell your current house to buy the new one (you need to cough up your cash savings to cover the negative equity). Though you'll benefit from saved interest on your mortgage in the second scenario.
« Last Edit: March 25, 2015, 01:32:58 PM by RWD »

math-ya

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Re: Best way to save up for a house?
« Reply #9 on: March 25, 2015, 03:04:52 PM »
In option one you can chose to foreclose, and keep your full 12k. so by not paying the note down you are keeping the real risk of the loan on the bank instead of on yourself

RWD

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Re: Best way to save up for a house?
« Reply #10 on: March 25, 2015, 03:28:37 PM »
In option one you can chose to foreclose, and keep your full 12k. so by not paying the note down you are keeping the real risk of the loan on the bank instead of on yourself

True, though wouldn't that affect your ability to get the next mortgage?

Keeping the money in savings does improve flexibility. I certainly wouldn't recommend putting extra cash towards your mortgage if that would deplete your emergency fund buffer.

Sid Hoffman

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Re: Best way to save up for a house?
« Reply #11 on: March 25, 2015, 03:31:51 PM »
In option one you can chose to foreclose, and keep your full 12k. so by not paying the note down you are keeping the real risk of the loan on the bank instead of on yourself

Yeah the banking system doesn't exactly work that way.

bizzy

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Re: Best way to save up for a house?
« Reply #12 on: March 25, 2015, 03:41:16 PM »
I don't think moving the money anywhere will make a difference if you want to save up. I own 3 homes, 2 are paid off and to me the only real way that matters is to be as conservative as possible in your daily lifestyle. Don't buy anything you don't need, don't get the newest phones or gadgets and that will make a difference in your savings. Other then that I don't think there is anywhere where you can put your money that will make such a great difference. especially since you will need the liquid cash soon. That's how I did anyways, it worked for me.
I should add that I own a small business and made about 200k per year. I know that's not the average income but I could say that by not spending my money when I had it made a big difference. I could have bought the fancy cars and expensive vacations but then I don't think I would even own one house.