Where to put the down..

August 4, 2012 3:37 PM

Not asking for specific investment recommendations, but general "conventional wisdom" on how best to sock away money for a down-payment on a house.

I'm currently in my 30's, have very little debt, contribute a decent percentage of my salary already to tax-deferred retirement plans, and want to save up from what's left over for the down on a house over a 5 year period. It seems like sticking this extra cash into a savings account is less than ideal given the current interest rates. Should I be looking at short term funds, or some other form of safe-ish investment, or is the mattress really the answer? Also, the party line on temporary reduction in retirement contributions for this purpose to speed things along or reduce the mortgage? I'll be seeing a professional for more specific advice but want to approach that conversation from a more educated position, and at least know what the "standard" advice would be here as I imagine this is a pretty common concern in financial planning.

posted by drpynchon to Work & Money (7 answers total)

I don't think it makes much of a difference where you're stashing money before you buy the house, because the amount of interest you can realistically earn is small - the principle you're earning it on is small (you're presumably starting from 0, and as soon as you hit your high point, you'll pull the money back out), and the timeframe you're looking at is short (presumably you're looki to buy a house in something like 3 or 5 and not 10 or 20 years).

I do think stopping retirement contributions while you do this is reasonable, with the reasoning being that not having to make a mortgage payment when you're retired (because your house was paid for earlier) will make more of a difference in your post-retirement life than an extra year or two of retirement savings.
posted by tylerkaraszewski at 3:46 PM on August 4, 2012 [2 favorites]

(Canadian, don't know if it's different elsewhere)
We had a chat with a bank advisor on the same subject, and the top recommendation was to get a good RRSP going. I'm not clear on how it works, but you can borrow or leverage the RRSP somehow when it comes time to get financing for a home purchase, plus of course you still have the money in the RRSP itself.
posted by L'Estrange Fruit at 4:03 PM on August 4, 2012

Decide on how much you want to spend on a house (usually 3x yearly salary is a good starting place).

Figure out how much taxes and insurance are on that price house (your local assessment office can help you out here as well as your auto insurance provider)

Add how much the mortgage payment, taxes and insurance are per month for the property you want. There are several online mortgage calculators you can use for this.

Find the cheapest place to rent you can.

Save the difference between 3 and 4. That is the start of your down payment. Of course save money any other way you can.

This method insures that when you start paying a mortgage, you can afford it. It is the time tested method of how to get a decent sum of money together.

BTW you want to have at least a couple of hundred extra a month over your mortgage payment to pay for maintenance and upgrades. I put this in a fund as part of my emergency fund and have found it to be about the right amount for an older house that needs some work that I can mostly do myself.
posted by bartonlong at 4:27 PM on August 4, 2012 [3 favorites]

I see a skipped a few things. Reducing retirement money to get the downpayment is pretty good sense. Especially if it lets you get the 20% down payment as that saves you a lot every month on mortgage insurance and a lower interest rate so that is an investment in your future like an IRA or 401K is. Outside of really risky hedge funds or day trading there ISN'T a better place to stick your money than a online savings account (I use ING, there are several) for something like this.

Good luck. I love being a homeowner. It is the best DIY project i have ever had.
posted by bartonlong at 4:31 PM on August 4, 2012 [1 favorite]

Regarding the American version of an RRSP - I honestly don't know if that more closely matches a 401k or an IRA, but you can take a "loan" from a 401k to buy a home, while an IRA has far more byzantine rules about buying houses (you can take out up to 10k without penalty, but you pay normal tax on it; or, you can use an IRA to buy an "investment" property as long as you never live in it). Overall, unless you already have a sizable 401k (as in, enough to retire on with plenty to spare), I would suggest not seriously considering that option because it will cost you more in the long run.

Personally, I would second tylerkaraszewski's point - How you invest it really doesn't make much difference. Just get a new savings account dedicated to your downpayment, have an appropriate amount direct deposited into it each pay period, and then don't touch it until ready to buy.

And I'll give you a friendly warning from from personal experience, have 5-10k extra in that account that you don't need to put toward your down payment, before you buy - Aside from seemingly-random closing costs, the first few months of owning a home will surprise you with a few grand in random expenses. :)
posted by pla at 8:02 PM on August 4, 2012

In the current tumultuous financial markets you should be more concerned with the return OF your money than the return ON your money. The classic way of ensuring this is to diversify your investments in as many ways as possible, never let one bank or one investment adviser control all your savings.
posted by Lanark at 4:17 AM on August 5, 2012

You can "ladder" CDs and maybe get a bit better interest on your money.

So, after saving for a year, buy a 4 year CD. Then after the second year, buy a 3 year CD. Etc.

That's about it. If you're saving large amounts of money, buy discounted T-bills. T-bills are in denominations of $10,000, but you buy them at a discount and then when they are mature, they're worth the full $10,000.

You don't want to tie up your money in the equities market. It's too risky. But you don't want to earn close to nothing in traditional savings account.
posted by Ruthless Bunny at 6:13 PM on August 5, 2012