Where should i keep downpayment for a new house

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scorcher31
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Where should i keep downpayment for a new house

Post by scorcher31 »

I was looking for thoughts on where to keep money for a new home downpayment. I am starting to squirrel away money in our high yield emergency savings account currently at about 125 k but only really get 0.5% interest. I may not want a house for a couple of years and the prices are getting crazy everywhere, hoping mortgage rates go up, supply goes up and prices drop at some point. I have targeting having at least 250k for downpayment, closing costs and still provide some reserve. We do have a paid off home, but only work about 320k and school district is supposed to be pretty bad. I would not sell until after I bought a new home. I have about 1,750,000 invested in combo of retirement and taxable (about 10% is probably bonds the rest are US and international equity funds. I don't want to touch any of that money for a house under any circumstance. I am happy with my asset allocation but annoyed to some degree because all this cash hanging around feels like it is dragging my allocation so much more conservative. Monthly I am probably investing about 12k all told into retirement now, but then 6k is going into the high yield savings It feels like 30% cash which isn't really what I wanted.

Anyone else find a better spot to put their large house downpayment than a high yield savings?
UpperNwGuy
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Re: Where should i keep downpayment for a new house

Post by UpperNwGuy »

Have you checked out certificates of deposit?
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scorcher31
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Re: Where should i keep downpayment for a new house

Post by scorcher31 »

UpperNwGuy wrote: Sat Jun 12, 2021 7:28 am Have you checked out certificates of deposit?
Do you know any ones with descent rates right now? The drawback is they usually have penalties if we take it out early, which could be an issue if we found a house we really liked. With that said we are only casually looking for now. Could be an option but the rate would have to be good to be worth it.
Jackk8888
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Re: Where should i keep downpayment for a new house

Post by Jackk8888 »

Great question. Same situation. What is your high yield .5% account?
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anon_investor
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Re: Where should i keep downpayment for a new house

Post by anon_investor »

scorcher31 wrote: Sat Jun 12, 2021 7:23 am I was looking for thoughts on where to keep money for a new home downpayment. I am starting to squirrel away money in our high yield emergency savings account currently at about 125 k but only really get 0.5% interest. I may not want a house for a couple of years and the prices are getting crazy everywhere, hoping mortgage rates go up, supply goes up and prices drop at some point. I have targeting having at least 250k for downpayment, closing costs and still provide some reserve. We do have a paid off home, but only work about 320k and school district is supposed to be pretty bad. I would not sell until after I bought a new home. I have about 1,750,000 invested in combo of retirement and taxable (about 10% is probably bonds the rest are US and international equity funds. I don't want to touch any of that money for a house under any circumstance. I am happy with my asset allocation but annoyed to some degree because all this cash hanging around feels like it is dragging my allocation so much more conservative. Monthly I am probably investing about 12k all told into retirement now, but then 6k is going into the high yield savings It feels like 30% cash which isn't really what I wanted.

Anyone else find a better spot to put their large house downpayment than a high yield savings?
If you won't buy for at least 1 year, check out I Bonds, at least you can match inflation for $20k.
regularguy455
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Re: Where should i keep downpayment for a new house

Post by regularguy455 »

Your time horizon is short so you should not be looking for yield. As much as having 6 figures in cash sucks, losing 20% in a week would be worse (if you put it in stocks).

The only alternative would be playing the checking bonus games. That’s the simplest way to put your cash to work.
mrscatterbrain
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Re: Where should i keep downpayment for a new house

Post by mrscatterbrain »

scorcher31 wrote: Sat Jun 12, 2021 7:35 am
UpperNwGuy wrote: Sat Jun 12, 2021 7:28 am Have you checked out certificates of deposit?
Do you know any ones with descent rates right now? The drawback is they usually have penalties if we take it out early, which could be an issue if we found a house we really liked. With that said we are only casually looking for now. Could be an option but the rate would have to be good to be worth it.
Look for “no-penalty” CDs. Ally has one with an 11-month term at 0.5% APY, the same has their HYSA…

I’m afraid there aren’t many good options to store cash at this time.
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Sandtrap
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Re: Where should i keep downpayment for a new house

Post by Sandtrap »

There are always good R/E deals to be had so if you are actively shopping and keeping tabs on an area, then your funds can be treated as “working capital”, so must have; safety of Principle, Liquidity, and Accessibility.
But, if you are committed to a certain longer timeline, and no sooner than that, then, yes, safely invest.

j🌺
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scorcher31
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Re: Where should i keep downpayment for a new house

Post by scorcher31 »

anon_investor wrote: Sat Jun 12, 2021 7:40 am
scorcher31 wrote: Sat Jun 12, 2021 7:23 am I was looking for thoughts on where to keep money for a new home downpayment. I am starting to squirrel away money in our high yield emergency savings account currently at about 125 k but only really get 0.5% interest. I may not want a house for a couple of years and the prices are getting crazy everywhere, hoping mortgage rates go up, supply goes up and prices drop at some point. I have targeting having at least 250k for downpayment, closing costs and still provide some reserve. We do have a paid off home, but only work about 320k and school district is supposed to be pretty bad. I would not sell until after I bought a new home. I have about 1,750,000 invested in combo of retirement and taxable (about 10% is probably bonds the rest are US and international equity funds. I don't want to touch any of that money for a house under any circumstance. I am happy with my asset allocation but annoyed to some degree because all this cash hanging around feels like it is dragging my allocation so much more conservative. Monthly I am probably investing about 12k all told into retirement now, but then 6k is going into the high yield savings It feels like 30% cash which isn't really what I wanted.

Anyone else find a better spot to put their large house downpayment than a high yield savings?
If you won't buy for at least 1 year, check out I Bonds, at least you can match inflation for $20k.
I bonds aren't a bad idea, forgot we could get 20k between 2 of us. Small in the grand scheme of things to buy in a couple years, but might not be bad going forward for my bond allocation in general.
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scorcher31
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Re: Where should i keep downpayment for a new house

Post by scorcher31 »

Sandtrap wrote: Sat Jun 12, 2021 7:47 am There are always good R/E deals to be had so if you are actively shopping and keeping tabs on an area, then your funds can be treated as “working capital”, so must have; safety of Principle, Liquidity, and Accessibility.
But, if you are committed to a certain longer timeline, and no sooner than that, then, yes, safely invest.

j🌺
Probably our fault for not actively shopping. We have a toddler that makes it difficult to get out to see homes at times, and we are about 100k short on what we want for a downpayment in our fund so it may take another year unless we stumble on something we love. We have never been real estate savy, better at pinching pennies and investing. The increasing prices have turned us amateurs off to some degree, even though my home is increasing in price in this market as well, it's probably not as much. I appreciate the input, as I know you know real estate.
lakpr
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Re: Where should i keep downpayment for a new house

Post by lakpr »

As had been said already: buy I-bonds for $10k per year for each of you, and with the remainder money, play checking account bonus games. There are a LOT of banks, both local and nationwide that would give you 1.5% to 3% annualized yields in terms of bonuses. If you want yield in this environment, you gotta work for it. Or make peace with the low yields.

https://www.doctorofcredit.com/best-ban ... t-bonuses/
runninginvestor
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Re: Where should i keep downpayment for a new house

Post by runninginvestor »

This may be contrary to many on BH's. For our bigger savings, we keep in an AA of Vanguards ST Federal (VSGDX) and Total Stock Market (VTSAX).

Here's a backtest on different AA's with this:
Note: using the investor share classes

This is not our EF. We hold an EF with slightly more in it for cushion just in case a big drop occurs at the same time we were ready to purchase our big ticket item. For example, the 80/20 AA has a largest drawdown of 6% in the housing crisis. So for each $100K, we'd just need $6,000 in something we could easily liquidate if the day we needed money the worst DD occured. That drawdown was <1 year which was something we felt we could tolerate.
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scorcher31
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Re: Where should i keep downpayment for a new house

Post by scorcher31 »

Any thoughts on putting the money in vnjux. Its a tax free state municipal bond fund. This is where I already put my taxable account bond money. Generally getting 2% vs 0.5% but I debate on benefits vs risks.
Willmunny
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Re: Where should i keep downpayment for a new house

Post by Willmunny »

scorcher31 wrote: Sat Jun 12, 2021 7:23 am I was looking for thoughts on where to keep money for a new home downpayment. I am starting to squirrel away money in our high yield emergency savings account currently at about 125 k but only really get 0.5% interest. I may not want a house for a couple of years and the prices are getting crazy everywhere, hoping mortgage rates go up, supply goes up and prices drop at some point. I have targeting having at least 250k for downpayment, closing costs and still provide some reserve. We do have a paid off home, but only work about 320k and school district is supposed to be pretty bad. I would not sell until after I bought a new home. I have about 1,750,000 invested in combo of retirement and taxable (about 10% is probably bonds the rest are US and international equity funds. I don't want to touch any of that money for a house under any circumstance. I am happy with my asset allocation but annoyed to some degree because all this cash hanging around feels like it is dragging my allocation so much more conservative. Monthly I am probably investing about 12k all told into retirement now, but then 6k is going into the high yield savings It feels like 30% cash which isn't really what I wanted.

Anyone else find a better spot to put their large house downpayment than a high yield savings?
If you "may not want a house for a of couple years," it sounds like it is possible you would want one sooner. So it sounds like your time horizon is sort of two years, but could be sooner if the right deal or real estate market conditions exist. I would stick with a 0.5% savings account for such money. You don't want to be in a position where you are ready to strike on the house you want and you have lost principal. Return of your money is more important here.

It stinks. I have some money (not nearly that much) tied up for short term savings goals, and that money is in a similar savings account. We just have to take what the terrible current fixed income market gives us for savings goals that, due to short duration, are not appropriate for equity risk.
MichaelAZ
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Re: Where should i keep downpayment for a new house

Post by MichaelAZ »

runninginvestor wrote: Sat Jun 12, 2021 8:41 am This may be contrary to many on BH's. For our bigger savings, we keep in an AA of Vanguards ST Federal (VSGDX) and Total Stock Market (VTSAX).

Here's a backtest on different AA's with this:
Note: using the investor share classes

This is not our EF. We hold an EF with slightly more in it for cushion just in case a big drop occurs at the same time we were ready to purchase our big ticket item. For example, the 80/20 AA has a largest drawdown of 6% in the housing crisis. So for each $100K, we'd just need $6,000 in something we could easily liquidate if the day we needed money the worst DD occured. That drawdown was <1 year which was something we felt we could tolerate.
This is exactly what I did. I was in OP's situation the past two years, holding onto $200K to buy a house (just purchased). I put it into 25% total stock (VTI) and 75% intermediate treasuries (VGIT). I was only down 3% ($194K) at the worst spot during the recession last year (March timeframe), even though stock market was down around 30%. Treasuries (not all bonds, but specifically treasuries) typically increase when stocks crash. The very high allocation to treasuries mitigates the stock loss. The result, historically at least, has been a reliable annual return with only a couple years of modest losses. The past two years, this strategy has made 10% each year, so who knows how it'll fair going forward. But with OP's high cash flow / savings rate and flexibility in timing, I view this modest investment allocation as the recommended approach.

Check out historical returns here on portfolio visualizer
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anon_investor
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Re: Where should i keep downpayment for a new house

Post by anon_investor »

MichaelAZ wrote: Sat Jun 12, 2021 11:21 am
runninginvestor wrote: Sat Jun 12, 2021 8:41 am This may be contrary to many on BH's. For our bigger savings, we keep in an AA of Vanguards ST Federal (VSGDX) and Total Stock Market (VTSAX).

Here's a backtest on different AA's with this:
Note: using the investor share classes

This is not our EF. We hold an EF with slightly more in it for cushion just in case a big drop occurs at the same time we were ready to purchase our big ticket item. For example, the 80/20 AA has a largest drawdown of 6% in the housing crisis. So for each $100K, we'd just need $6,000 in something we could easily liquidate if the day we needed money the worst DD occured. That drawdown was <1 year which was something we felt we could tolerate.
This is exactly what I did. I was in OP's situation the past two years, holding onto $200K to buy a house (just purchased). I put it into 25% total stock (VTI) and 75% intermediate treasuries (VGIT). I was only down 3% ($194K) at the worst spot during the recession last year (March timeframe), even though stock market was down around 30%. Treasuries (not all bonds, but specifically treasuries) typically increase when stocks crash. The very high allocation to treasuries mitigates the stock loss. The result, historically at least, has been a reliable annual return with only a couple years of modest losses. The past two years, this strategy has made 10% each year, so who knows how it'll fair going forward. But with OP's high cash flow / savings rate and flexibility in timing, I view this modest investment allocation as the recommended approach.

Check out historical returns here on portfolio visualizer
How did you decide on 25%/75%?
lakpr
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Re: Where should i keep downpayment for a new house

Post by lakpr »

anon_investor wrote: Sat Jun 12, 2021 11:32 am How did you decide on 25%/75%?
I am not @MichaelAZ, but I heard this before. The basic idea comes from the Risk Efficient Frontier theory, which says that the Risk-Return graph is a hockey-stick shaped curve, and the least risk (the bend point on the hockey-stick) is obtained with a 25:75 allocation, not with a 0:100 allocation. The Risk Efficient Frontier theory is developed by Harry Markowitz in 1952, so is quite old theory.

https://www.youngresearch.com/authors/e ... -frontier/
RiskEfficientFrontierTheory wrote:On the vertical axis is the return earned by the portfolios, and along the horizontal axis is a measure of how much risk was taken to earn those returns. As you can see by comparing the portfolio of 75% bonds and 25% stocks to the portfolio of just bonds, as portfolios take on a small number of stocks, the benefits of diversification lower risk and increase reward. Anything above the line is unachievable because no portfolios earning those returns are available at the corresponding risk levels. And any portfolios that fall below the line can be outperformed with the same amount of risk or have their returns matched with less risk.
At least based on the portfolio visualizer link supplied by @MichaelAZ, the concept of "least risk" seems to have held remarkably well over the past 50 years!

I have also tried playing with the stock allocations, using a 15% US stock market and 10% international stock market allocation instead of 25% purely to domestic stocks (approximately in line with Vanguard's recommendation of 60% US equities to 40% international equities in all its funds). It seems to have dampened the returns a bit, but on the positive side, the max draw down is lessened as well.
Last edited by lakpr on Sat Jun 12, 2021 11:44 am, edited 1 time in total.
shess
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Re: Where should i keep downpayment for a new house

Post by shess »

Low cash rates is literally the price you pay to make sure those funds are available on your schedule for your goals. You can do better if you're willing to change your goals to accommodate where you're storing your money - for instance, you could store it in the broad stock market if you're willing to forgo buying a house if the market crashes, or buy a cheaper house in a less-desirable neighborhood.

Or, let me put it another way: Would you like to put it in a 5% savings account? What if I told you that in addition, mortgage rates would be 11% and inflation would be 7%, does that change you mind at all? Or how about you reach for yield with a longer-term bond fund or lower credit rating. If you find a house and get an 8% haircut to free your money up, will it make you feel better knowing that someone a decade ago or a decade hence does very well in that asset?

Personally, given a paid-off home and the portfolio you describe, I wouldn't lose a ton of sleep over $200k in a low-risk position, since you have a specific goal for it.
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iceport
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Re: Where should i keep downpayment for a new house

Post by iceport »

FWIW, I have a similarly sized sum with a similar time horizon parked for home renovations in Vanguard Short-Term Corporate Bond Index Fund (VSCSX). It's currently yielding 0.74%, with an average duration of 2.8 years.

I started using this towards the end of 2017, when my credit union drastically lowered its savings rates, which had been extremely competitive, and VSCSX was yielding in the neighborhood of 3% (!).

There is a tad bit of volatility associated with this fund, but nothing that has concerned me. In fact, I was able to TLH back and forth with VFSUX (an "actively" managed twin, current yield = 0.86%) during a shallow drop in value to generate ~ $1k in realized losses. And then slightly dropping interest rates led to a growth spurt. :greedy

However, as always, YMMV! I don't see rates dropping again anytime soon. (Then again, I didn't see the last interest rate drops coming, either...)

Image

I do feel for you, though. I know the timing can be critical. You can spend months or years looking, and then, depending on the local housing market, you might have to act in a matter of hours to make a viable offer — and that might come at the worst possible time for your savings balance. :annoyed
"Discipline matters more than allocation.” ─William Bernstein
Lee_WSP
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Re: Where should i keep downpayment for a new house

Post by Lee_WSP »

It depends on how much of a hit to capital you are willing and able to absorb. A bond fund is not a savings account, but it’s historical max drawdown is not nearly as bad as stocks.

You do not have a set timeline per se. From your post, it sounds like you are in the “asset/buying power preservation” game rather than the “grow my money” game.
MichaelAZ
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Re: Where should i keep downpayment for a new house

Post by MichaelAZ »

anon_investor wrote: Sat Jun 12, 2021 11:32 am
MichaelAZ wrote: Sat Jun 12, 2021 11:21 am
runninginvestor wrote: Sat Jun 12, 2021 8:41 am This may be contrary to many on BH's. For our bigger savings, we keep in an AA of Vanguards ST Federal (VSGDX) and Total Stock Market (VTSAX).

Here's a backtest on different AA's with this:
Note: using the investor share classes

This is not our EF. We hold an EF with slightly more in it for cushion just in case a big drop occurs at the same time we were ready to purchase our big ticket item. For example, the 80/20 AA has a largest drawdown of 6% in the housing crisis. So for each $100K, we'd just need $6,000 in something we could easily liquidate if the day we needed money the worst DD occured. That drawdown was <1 year which was something we felt we could tolerate.
This is exactly what I did. I was in OP's situation the past two years, holding onto $200K to buy a house (just purchased). I put it into 25% total stock (VTI) and 75% intermediate treasuries (VGIT). I was only down 3% ($194K) at the worst spot during the recession last year (March timeframe), even though stock market was down around 30%. Treasuries (not all bonds, but specifically treasuries) typically increase when stocks crash. The very high allocation to treasuries mitigates the stock loss. The result, historically at least, has been a reliable annual return with only a couple years of modest losses. The past two years, this strategy has made 10% each year, so who knows how it'll fair going forward. But with OP's high cash flow / savings rate and flexibility in timing, I view this modest investment allocation as the recommended approach.

Check out historical returns here on portfolio visualizer
How did you decide on 25%/75%?
Portfolio visualizer showed me that that allocation had basically never had a losing year the past 20 years. And the max drawdown was less than 10%. Very conservative. When stocks drop, money usually flees to treasuries, so the high allocation to treasuries largely offsets the stock loss.
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