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where/how would you invest house downpayment money?

N

nageov3t

Lifer
random question for the ATOT financial gurus.

I'm in my early 30's and figuring that I'm finally in a good place where I can start saving serious money for a house downpayment... I'm figuring I'd want about $25,000 for 10% down on a reasonable house (around here, I reckon that'd get me something along the lines of a decent townhouse or mid-sized fixer-upper in the burbs), and I reason that I can somewhat easily save $400/month plus any extra money outside of my regular salary (Christmas bonuses, overtime, tax refund, etc)

the question is, where would you let the money sit while waiting for it to reach the magic number? regular old savings account? under the mattress? just trying to think of what my options are... I'm a bit of a noob, at the moment my only accounts are my regular checking/savings account, 401k, and IRA.
 
I would keep it in a savings account. That said, you don't need any savings to purchase a house. Banks will still give out mortgages for the entire cost of the house plus closing costs.
 
You don't need 10% to get into a house and interest rates are going nowhere but up. When the time is right depends on your particular situation, but be careful not to pass up good rates needlessly. If you have 20% to put down you get to bypass mortgage insurance and that will save you money, but otherwise there are various loan options available.
 
How far away are we talking? If its only a couple of years its more saving than investing. The important difference being that investing comes with more downside risk than savings while saving trades return on investment for principle protection.

While the returns are low I would look into a money market or even a CD. CDs might be slightly harder to get money out of (ie wire transfer) but will likely offer a higher ROI. I haven't looked recently but its not uncommon to do be able to get a 5 year CD - cash it out in 3, take the penalty and still come out ahead of a money market account or traditional savings account. PenFed typically has some of the best rates and you could cash it in early once you start seriously looking to mitigate the liquidity issue

If you are looking more long term (ie 5+ years) then investing in something like an index fund might be something to consider as long as you understand that at the end of 5 years you may have less than when you started. The 5 year S&P average return is ~7% with a high of 26% and a low of -9%
 
I had like $200k sitting in an account earning 1% towards the end of my saving as I shopped for a place. Sucked since if it had been in stocks I would have had a chunk more. But I was very risk averse with that money.
 
Dirigible said:
I had like $200k sitting in an account earning 1% towards the end of my saving as I shopped for a place. Sucked since if it had been in stocks I would have had a chunk more. But I was very risk averse with that money.
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Well, if you needed it within a relatively tight timeframe, stocks would have been risky no matter how "safe" the stock.
 
Exterous said:
How far away are we talking? If its only a couple of years its more saving than investing. The important difference being that investing comes with more downside risk than savings while saving trades return on investment for principle protection.
Click to expand...

I'd estimate on about 5 years... there's also the possibility of a huge inheritance, but that's not exactly something I can count on (currently, I'm renting out the second unit in a 2-family house that my great aunt owns (she lives in the other apartment)... the presumption if that when she dies, the house will be left to my mom. since I've been staying in the house and helping to take care of my aunt, my mom said that if that happens, we'd sell the house and she'd split the profits with me)

interesting on the no downpayment thing... I thought that went out the window after the housing bubble crashed and that 10% was the standard?
 
I'd find a high yield checking account, the only annoying requirement is up to 15 debit card transactions per month.

Union Center National Bank — 3.60%
If you’re in the New York-New Jersey metro area, Union Center National Bank has a solid option in its Super Heart Smart Checking. The checking plan comes with 3.60% interest as long as you don’t hold more than $30,000 in the account. You need to complete 15 debit card purchases a month and sign up for direct deposit with your checking account to qualify. If you don’t meet those monthly requirements, your rate will drop to 0.10%. Union Center National has headquarters in Union, N.J., just west of New York City. The bank operates 16 branches in Northeast New Jersey.
Click to expand...

You can probably find other local Credit Unions offering 3.x% with some creative Google searches.
 
loki8481 said:
I'd estimate on about 5 years... there's also the possibility of a huge inheritance, but that's not exactly something I can count on (currently, I'm renting out the second unit in a 2-family house that my great aunt owns (she lives in the other apartment)... the presumption if that when she dies, the house will be left to my mom. since I've been staying in the house and helping to take care of my aunt, my mom said that if that happens, we'd sell the house and she'd split the profits with me)

interesting on the no downpayment thing... I thought that went out the window after the housing bubble crashed and that 10% was the standard?
Click to expand...

If it was me and i knew i was looking at 5 years down the road or so...i'd invest it in a rounded out portfolio. Something like a Total Stock market Fund, Total International Fund, and Bond fund. Better chance at actually making some money off it and since its 5 years you have longer to let it recover if theres a downfall in the market in the next 2-3 years.

Other option i would look at is either the checking/savings accounts with good rates...but what the fine print on them. many require 15 debit purchses and have maximum amounts you can have in the account earning the high percentage. Or go with a Bond (I bond) or CD's. You can get ok rates (2-3%) and still be able to pull out the money if needed

And yes there are options for no down payment loans. Just depends wher eyou live as to what is available. I got a USDA loan which was zero down with no real PMI (pay it upfront)
 
velillen said:
If it was me and i knew i was looking at 5 years down the road or so...i'd invest it in a rounded out portfolio. Something like a Total Stock market Fund, Total International Fund, and Bond fund. Better chance at actually making some money off it and since its 5 years you have longer to let it recover if theres a downfall in the market in the next 2-3 years.
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Genx87 said:
Bonds or stock market. Anything else and you will most likely lose out to inflation.
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How is your 5 year crystal ball? I know mine is pretty cloudy. The important thing that needs to be considered is how important is it that he be ready when the house becomes available. Sure you may lose some money to inflation but the principle will be there when he needs it. This is not something you can guarantee with stocks and bonds.

In terms of recovering 3 years is not that long to recover from an early 2 year loss. 2006-2007 is a great example: If Loki8481 had invested in an index fund like VTSMX or even a rounded 3 fund portfolio including VBTIX for bonds and VGTSX for foreign he would still be down in principle after 5 years

So if he's willing to take the risk that the money might not be there when he needs it then investing could be better. If that is not something he would want to risk then there are better alternatives like velillen mentioned later in his post
 
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you don't necessarily need 20% down to avoid PMI. i purchased with 5% down, then refi'd a few years later to a shorter term with a lower rate. i was surprised that they took PMI off, even though i didn't have any equity in the home.

do a 5% down and save the rest for emergencies.
 
SandEagle said:
you don't necessarily need 20% down to avoid PMI. i purchased with 5% down, then refi'd a few years later to a shorter term with a lower rate. i was surprised that they took PMI off, even though i didn't have any equity in the home.

do a 5% down and save the rest for emergencies.
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or just get lucky with a good credit union. we only put down 5% and have no PMI. we could have put 0% down and had no PMI either but opted to put 5% down to get a better rate.
 
Exterous said:
How is your 5 year crystal ball? I know mine is pretty cloudy. The important thing that needs to be considered is how important is it that he be ready when the house becomes available. Sure you may lose some money to inflation but the principle will be there when he needs it. This is not something you can guarantee with stocks and bonds.

In terms of recovering 3 years is not that long to recover from an early 2 year loss. 2006-2007 is a great example: If Loki8481 had invested in an index fund like VTSMX or even a rounded 3 fund portfolio including VBTIX for bonds and VGTSX for foreign he would still be down in principle after 5 years

So if he's willing to take the risk that the money might not be there when he needs it then investing could be better. If that is not something he would want to risk then there are better alternatives like velillen mentioned later in his post
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Theres risks in everything though. He could have bought a house is 2006-2007 and still not be recovering from the loses yet as well. Id rather be active and make money and be smart about when to sell off. I lost very little in 2008 just by being proactive and monitoring things and knowing when to GTFO with my persoanl investments (to be honest i was lucky as i got out on day 1 fearing the worst) and then same with having an idea on when to buy back in (to be fair i got in a bit early and lost a bit the first 6 months but made it all back in the next year)

Also you have to remember 2008 was the worst weekly drop ever for the Dow at 18%. The rest of the crash occurred over (i believe) it was a year to hit rock bottom? So hopefully you would have been somewhat proactive and cashed out before then.

Its one of the great things about investing. There options for everyone. if you dont want to keep on top of things then a savings/cd's are great options. If you dont mind being a bit more involved then funds can yield a lot more, or if you want to be (imo) silly you can hand pick stocks 🙂

So yes the 30k you invest no might grow to 31k in 5 years (made up numbers) with a cd/savings account but what if the housing market recovers more so housing prices are higher and interests rates are higher. Then your 30k that was good today, well that 31k in 5 years might just not be quite enough either.

As Exterous said the crystal ball for the future is cloudy so its up to each person to do as they want. If we were talking 1-3 years my answer would have been completely different. Sam ewith 3-6 year answer being different than if OP had said this was for 10 years from now
 
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Either have a 20% + down payment or practically nothing at all.

Anything < 20% and you're getting an FHA loan with mandatory PMI (Insurance for the bank that you will pay your mortgage, so basically, a ~$50/monthly charge?) See: http://en.wikipedia.org/wiki/Private_Mortgage_Insurance

Anything > 20% and you can get a normal 30-Year mortgage and go without PMI (basically throwing money away).

FHA loans have their place. There's nothing better than a 3% APR financed home paying practically nothing month to month. Toss in your extra cash in investments to earn more than what you would gain by paying the loan off early. I'm still crying that I didn't refinance our 5% APR back in July when it was ~3.5%. Now it's back up to ~4.25% and it's not even worth the closing costs ='/
 
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Exterous said:
How far away are we talking? If its only a couple of years its more saving than investing. The important difference being that investing comes with more downside risk than savings while saving trades return on investment for principle protection.

While the returns are low I would look into a money market or even a CD. CDs might be slightly harder to get money out of (ie wire transfer) but will likely offer a higher ROI. I haven't looked recently but its not uncommon to do be able to get a 5 year CD - cash it out in 3, take the penalty and still come out ahead of a money market account or traditional savings account. PenFed typically has some of the best rates and you could cash it in early once you start seriously looking to mitigate the liquidity issue

If you are looking more long term (ie 5+ years) then investing in something like an index fund might be something to consider as long as you understand that at the end of 5 years you may have less than when you started. The 5 year S&P average return is ~7% with a high of 26% and a low of -9%
Click to expand...

Also, I agree with this. Putting your money in a savings account will only lose value to inflation.

At least try to keep a good 2%+ interest rate with a CD in the meantime.
 
s0me0nesmind1 said:
Either have a 20% + down payment or practically nothing at all.

Anything < 20% and you're getting an FHA loan with mandatory PMI (Insurance for the bank that you will pay your mortgage, so basically, a ~$50/monthly charge?) See: http://en.wikipedia.org/wiki/Private_Mortgage_Insurance

Anything > 20% and you can get a normal 30-Year mortgage and go without PMI (basically throwing money away).

FHA loans have their place. There's nothing better than a 3% APR financed home paying practically nothing month to month. Toss in your extra cash in investments to earn more than what you would gain by paying the loan off early. I'm still crying that I didn't refinance our 5% APR back in July when it was ~3.5%. Now it's back up to ~4.25% and it's not even worth the closing costs ='/
Click to expand...

some credit unions offer 100% financing conventional loans with no PMI so this isn't true. i know because i have one of them (although i put 5% down).
 
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