Coming up with a sizable down payment is one of the key barriers to affording a home. Learning how to invest your down payment if you're planning to buy a house is a whole other issue.
On the one hand, you want to invest your down payment conservatively so that's it's available once you find your ideal house. On the other hand, you would ideally like to invest your down payment wisely so that it grows even bigger. With a bigger down payment, you can lower your monthly payments or buy a nicer house.
This article will give you a framework on how to invest your down payment based on when you plan to buy a house. The longer out the timeframe, the more aggressive you can invest your down payment and vice versa.
My Background Info On Real Estate
I've been a multiple property owner since 2003 and have written over 2,500 personal finance articles on Financial Samurai since 2009. Real estate is my favorite asset class to build wealth as it accounts for about $150,000 a year out of the $300,000+ in passive income I earn each year. Let me share some of my wisdom about investing your down payment if you're planning to buy a home.
You can also invest in real estate without the burden of a mortgage or maintenance with Fundrise. With over $3.2 billion in assets under management and 380,000+ investors, Fundrise specializes in residential and industrial real estate.
I’ve personally invested $150,000 with Fundrise to generate more passive income through real estate. The investment minimum is only $10, so it's easy for everybody to dollar-cost average in and build exposure. As mortgage rates come down, I believe real estate will catch up to the stock market. There is a tremendous amount of pent-up demand.
How To Invest Your Down Payment If You're Buying A House
The main variables in your down payment investment decision are: time, return, risk, existing cash, and cash flow.
Here are some assumptions to think about:
- The closer you are to buying a house the less risk you should take.
- The lower your risk tolerance, the lower risk you should take.
- The better your investing acumen, the more risk you are able to take.
- The higher your existing cash balance (down payment or full payment), the more risk you can take.
- The higher your cash flow, the more risk you can take.
- The higher the mortgage interest rate, the bigger the down payment you should make.
- The higher you expect mortgage rates to go, the pickier you should be.
- The more bullish you are about your financial future, the more leverage you may take.
- Investments should be made in investments that can become liquid by the time you want to purchase.
Everybody is at a different financial stage of their lives. Therefore, the one absolute variable we should focus on is the timing of your house purchase.
The Minimum Down Payment Amount
To follow my 30/30/3 home buying rule, everybody should have a minimum of 20% down payment plus a 5% – 10% cash buffer after the down payment.
If you do not have between 25% – 30% of the value of the house in cash, you cannot comfortably afford the house. Being house rich cash poor will make you stressed out.
One of the main reasons why there was a housing crisis in 2008-2010 was because too many Americans put down 3% or less. Buyers didn't have sufficient cash left over to pay their mortgage once they lost their jobs. That's stressful!
Please don't put your financial future at risk while also jeopardizing your neighbor's financial future as well. Think of others.
Back then, many homeowners took out negative amortizing loans with no income verification and no down payments. That was the only way to be able to “afford” their homes.
If they had had a 5% – 10% cash cushion after putting down 20%, I'm certain the vast majority of homeowners who defaulted would have been able to keep up with their obligations.
Type Of Mortgage Matters Too
Further, if homebuyers back pre-2007 had taken out adjustable rate mortgages, they would have found mortgage relief as their rates adjusted lower. Nowadays, lenders are quite strict. Lenders are mostly offering 30-year fixed, 15-year fixed, 5/1 ARM, and 7/1 ARM mortgage. The days of negative amortizing mortgages are long gone.
Please, if you do not have between 25% – 30% of the value of the house in cash before purchase, getting to at least 25% – 30% should be your #1 priority. Work longer. Save more. Ask the Bank of Mom & Dad for a gift like so many adults do in big cities nowadays.
There once was a time when the majority of Americans purchased property with 100% cash. Therefore, don't think that it's unfair you can't buy a house without at least a 20% down payment.
In 2023 and beyond, we need to be more prudent when buying property given the mania has died down. People are remodeling for greater passive income. Owners were taking out HELOCs. Bidding wars were popping up all over the place.
You don't want to winning a bidding war frenzy because that likely means you overpaid at that moment. Try and stay disciplined. If you miss a property, there will always be another great one that will come along.
Time Of Purchase Is Priority When Considering How To Invest Down Payment
Now that we've agreed on the down payment and cash buffer, let's look at the main assumption. The closer you are to buying a house the less risk you should take.
I've divided the time of purchase into three segments:
- 5 years away or longer
- 2-5 years away
- Within the next 1-2 years
You should carve out an investment portfolio specifically for your house purchase. Let's call it your House Fund. Your House Fund is a separate after-tax portfolio from your pre-tax retirement funds like your 401(k), IRA, SEP IRA, Roth 401(k), 403(b), and so forth.
Compartmentalizing your investments for different purposes helps with motivation and risk-appropriate investing.
For example, you might be inclined to take more risk with your 401(k) since you won't be able to tap it for 30 years. The same type of risk is probably inappropriate for your House Fund if the down payment is due next week.
Investing Down Payment If Buying A House 5 Years Away Or Longer
Let's say you're just starting on your House Fund journey. You're in your 20s and not quite sure where you want to live. You're also not quite sure what you want to do with your life. You know you'll eventually want to settle down, but not until you find a stable career.
Five years away or longer sounds about right. During this time, you also need time to accumulate your 20% down payment plus 5% cash buffer. You take the median price of the homes you'd like to buy, multiply it by 25% to come up with your minimum House Fund goal.
So much can happen in five years that it's impossible to know the future. You might not even want to buy a house five years later. Therefore, you should invest your House Fund as you would your retirement accounts based on your age or work experience.
Recessions generally don't last longer than 18 months. Therefore, if your time horizon is truly five years or longer, you have time to make up for your losses through savings and investment returns. You should always have 6-12 months of cash in a separate account by the way.
With a 5+-year time horizon, you can invest your down payment much more aggressively in stocks. You can also literally invest in a private real estate fund to better track the real estate market.
Investing Down Payment If Buying A House In The Next 2 – 5 Years
You're pretty certain that you plan to buy a house within the next 2-5 years. You've found a stable job, a nice city, and maybe even a love interest to settle down with. You're excited about a future that is slowly getting clearer!
You're now much more focused on ensuring your down payment is always increasing. Therefore, it's only logical to dial back some risk.
At the same time, you might also be in the high growth phase of your career. Your income and savings have a tremendous ability to buffer investment losses in your House Fund.
You can adjust your House Fund investment allocation according to your financial health and your purchase time horizon.
If you're bullish on your financial future and don't plan to buy a house until year 4 or 5, then you can probably take maximum risk by going 100% in stocks.
On the other hand, if you work in an occupation with 0% – 3% annual wage growth in an industry facing structural declines, you may want to consider a maximum 50% stock allocation while boosting your cash allocation.
Investing Down Payment If Buying A House Within The Next 12-24 Months
If you're planning on buying a house with the next 12-24 months, it's crunch time. You do not want to expose your down payment to potential market losses.
Even if you think you're still two years away from purchasing, because you're so focused on buying a house, there's a good chance you might buy one much earlier. Therefore, you should invest your down payment more conservatively.
For those of you who have a high risk tolerance and who have very strong cash flow, I suggest limiting your House Fund stock exposure to no more than 25%. This way, even if your 25% goes down by 30% in a bear market, the most your House Fund will lose is 7.5%.
But given you should earn roughly 4%+ from the remaining 75%, your House Fund won't lose more than 6% in such a bear market scenario. Besides, with Treasury bonds yielding 4.5%+, it pays well to be conservative.
Investing Down Payment If Buying A House Within The Next 6 Months
If you are determine to buy a house within the next 6 months, you must be ultra-conservative with your down payment investments. It's not worth risking trying to earn a greater return than the risk-free rate due to potential loss. If you don't have as much funds as possible to submit a strong offer, the seller will likely reject you for a better one.
I would keep most of your down payment in a money market fund or 3-to-6-month Treasury bonds, which can always be sold. Given money market and interest rates are still relatively high, it pays more to wait.
Bear Market Positive When Buying A Home
Sometimes there will be a downturn in the housing market when you want to buy. This is actually great, especially if your down payment holds its value or goes up. This means you can buy your house for less. If the house is declining in value greater than your House Fund is declining in value, you're winning.
If you're deciding to upgrade to a more expensive home, you'll likely also winning even if your existing home is losing value. Real estate is cyclical. It's scarier to buy a home when prices are declining, but I'd much rather buy when prices are down and there's less competition than when there's a frenzy.
In a down market, you no longer have to waive your home inspection contingency to be competitive. Having the seller accept your offer with contingencies will feel great because your earnest money deposit won't be at risk if you decide not to buy. It's like getting a free call option.
Your bond allocation should be completely in short-term Treasury bonds, e.g., 3-month is likely best. Because it usually takes 30-60 days to close on a house on average, you don't want to tie up your money in longer-dated Treasury bonds. You can always sell before expiration, but by doing so you risk potential principal loss.
With money market accounts yielding more nowadays, you can also have 100% of your House Fund in cash for maximum flexibility and security. Growing your down payment risk-free is a good feeling.
Invest Your Down Payment Wisely
Buying a house can be a very emotional experience. There will be times when you put in your best offer and it's simply not good enough due to price. Or maybe your down payment size was too small. Or maybe you didn't write a nice real estate love letter.
Chances are high that if you find your dream house, many other people will like it too.
Therefore, it's wise to make your down payment as strong as possible. You'll already be stressed during the house purchase. You don't want to add to your stress by worrying about whether your down payment is sufficiently attractive to the seller.
If you've never owned your primary residence, you're in for a treat once you finally do. When you get your keys, you will experience a priceless feeling that nobody really talks about.
It's an amazing feeling to own an asset that not only has the potential to go up in value, but also provides utility every day. I truly believe for most people, owning real estate is one of the easiest ways to build long term wealth.
In contrast, you will never be able to enjoy your stocks or your savings. But with real estate, you'll be able to create wonderful experiences.
Down Payment Investment Recommendations
If you're looking at specific recommendations on where to invest your down payment, here are some to consider:
1) A high-yield savings account or money market fund.
Money market rates and high-yield savings account rates are higher after the Fed's aggressive rate hikes since 2022.
2) A S&P 500 ETF.
I wouldn't get too fancy and pick individual stocks with your down payment money. I would invest your downpayment in an S&P 500 ETF like SPY, VTI, or IVV. They are all similar, low-cost ETFs.
3) A Treasury Bond.
I'd buy individual Treasury bonds with a 3-month or 6-month duration. You're guaranteed to earn the interest and get paid back your principal after the duration is over.
Alternatively, you could buy a Treasury bond ETF like IEF. IEF is the 7-10-year Treasury Bond ETF that is relatively stable. However, there is no maturity date, and your principal will fluctuate in value as you earn interest.
I wouldn't invest in individual municipal bonds as part of your down payment. Even though highly-rated muni bonds are tax-efficient and safe, muni bonds are expensive and cumbersome to sell. The market for individual muni bonds is not as liquid.
4) Real estate investments.
If you're looking to buy real estate and are still a ways out, you may want to invest some of your down payment in real estate investments. This way, you'll rise and fall with the real estate cycle. The last thing you want is for your target real estate to go up 10% while you don't participate.
Therefore, you can buy various real estate investments such as a publicly-traded REIT like VNQ or O. You can buy real estate-related companies like Home Depot, Redfin, American Homes, and Zillow. And you can also invest in real estate crowdfunding.
Favorite Real Estate Platforms
Take a look at Fundrise, one of the largest real estate investing platforms with over $3.2 billion in assets managed and 380,000+ investors. Fundrise primarily invests in the Sunbelt where valuations are lower and yields are higher. You can diversify across many properties in a real estate with as little as $10.
Fundrise has historically provided very steady returns. During bear markets or times of volatility, Fundrise returns have significantly outperformed. For most people, investing in a diversified real estate portfolio is the way to go. I've personally invested over $300,000 in Fundrise.
If you are an accredited investor, take a look at CrowdStreet. CrowdStreet provides a way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations ad higher rental yields. If you have a lot of capital, you can build your own select real estate fund.
Both platforms are Financial Samurai sponsors and Financial Samurai is a six-figure investor in Fundrise funds. I've personally invested $954,000 total in private real estate to diversify and earn income 100% passively. Real estate crowdfunding is like a Bonds Plus investment. It has higher yields, more offensive, but also has defensive during difficult times.
Shop Around For A Mortgage
When you finally are able to come up with a large enough down payment, shop around for the lowest mortgage rates online. You'll get multiple real quotes with no-obligation to sign in minutes.
You should also also contact your main bank and check their latest rates. Perhaps they can give you a loyalty discount or multi-account opening discount. If you have a lot of assets with the one bank, you may get relationship mortgage pricing as well.
Best of luck with your house hunt! Remember, your down payment is meant to be used as a down payment for a home. Don't use it as a stock trading account or do buy anything else! Otherwise, you may end up renting forever.
How To Invest Your Down Payment is a Financial Samurai original post. All rights reserved.
The new ETF $BOXX might be a good way to hold a down payment for a couple of years. It has advantages in that it generates short term Treasury returns while deferring taxes until you sell the ETF. It pays no distributions, so all of the return is in appreciation. The returns mimic short term Treasuries by using box spreads.
With rising interest rates, higher mortage rates and geopolitical concerns I decided to pause my plans to purchase a house for now. Where should I invest my down payment instead of it sitting in my savings account where it has been highly accessible. I would like to be able to access the cash in about 1 year when interest rates will hopefully go back down (no crystal ball though!). Is 1 year too short a period for Fundrise? Thank you.
Thank you for this post! Will an IEF treasury bond work for these scenarios? It seems like it’s a longer term investment.
Buying a s&p 500 etf in a taxable account to save, or in another 401k or roth ira? I already have a roth ira for retirement, but want another place to invest for a house.
I liked that you mentioned if you don’t have between 25%-30% of the value of the house for a down payment you cannot afford a house. My brother is thinking about buying his first house, and we are looking for advice to help him. I will let him know about your recommendations to help him prepare to buy his first house.
I always thought that the whole idea of mortgage is about not being able to afford a house. Whether you put 20, 30,50, 80, or even 99 percent down – you cannot afford a house because a house costs 100% of what it costs and not any less. Period. If you put a 100% down – then you purchased a house FULLY and not partially! Once you buy it fully – no mortgage is necessary. The reason you want a mortgage in the first place is because you want to get in debt to buy a house you cannot fully afford to buy.
That’s a great point that you want to invest in secure stocks and bonds to avoid risk the closer you get to actually buying the property. My sister really wants to upsize her current living situation, but she and her husband are still trying to save enough for a down payment. I’ll have to make sure she checks out your article so that she can save up faster and get her dream home.
Thank you for writing this article!
Would you recommend that people utilize a specific type of equity for their house fund? For example, a total market index or total world ETF. It seems that you decided to go with tech heavy stocks – why did you chose this?
I am considering something like large cap stocks – they tend to be less volatile than small cap or other niche sectors/industries. Since I am uncertain of the exact time I will buy a home, the larger cap equities seemed to be a better option for the equity portion of the house fund (although I understand that nobody knows what the future holds)…
I look forward to your insight!
Sam I am very glad that I found your website. It’s very informative and unbiased. I am hoping you can assist me.
I am a freshly divorced female, 62 years old, and I plan to work for 15+ more years. I plan to move to Las Vegas by August 2019. I qualify for a one day out of foreclosure non conventional mortgage and plan to put 15% as a down payment. I am employable so no worries regarding employment to qualify or keep up with my payments.
My question is there has been an increase in home values in the LV area due to the ever expanding home building, sports, etc making it a feeding frenzy for bloated real estate brokers. There is plenty of inventory but the home prices have finally steadied at 5% increase due to a flurry of buyers from California, primarily retirees, who can easily pay cash for a home at an inflated price due to their looking at the home price as cheap compared to CA.
I’m hearing and reading conflicting reports regarding the bubble in Las Vegas. I lost all of my real estate investments in 2007 and survived a crummy marriage and I cannot afford to take another risk. However, I do want to purchase a SF home sooner than later.
Any comments are appreciated.
Thank you.
What do you base the RE market cooling off ? I’m in the market for my first home , looking for townhomes in the south bay area
All the data coming out on prices, inventory, time on market.
Is there any way to get the raw data to analyze it ? Where do you get/look at this data ?
I have my down payment in a money market account and I’m within about a year of buying though the market in the bay isn’t great for buyers Atm. I don’t really “need” a house. What about buying office space? I should probably just start a startup company the way RE is looking here
Hi Sam,
I read an interesting article in the Wall St Journal this week in an article about how most people typically have financial inertia and end up keeping their keep cash balances in lower yielding options by default even when there’s risk free options that pay a couple percent.
It described a new fintech company, MaxMyInterest, that optimizes sweeping cash from your checking to the highest yield savings accounts. It seemed like a helpful approach in line with your philosophy of automating financial behaviors. Wondered what your thoughts were on that service or other ways to automate investing and cash management.
Thanks!
A lot of people I know usually aim for at least a 10% deposit with their house, so it’s eye opening to read the 25% – 30% but it definitely does make sense.
I think it’s important not to think like most people. Because if you look at the stats, most people aren’t doing well financially. Let’s strive to be better!
I have not read your blog in a while, still such great content! I was surprised you had a baby, I guess it has been that long. I am thinking about a bigger home to build a back house and hopefully have my in laws live there, due to health issues. This article was just what I needed to review my goals.
As you’ve pointed out with money market accounts yielding a healthy 2% or higher, why buy any treasury bond and take the risks of raising interest rate? (Trying to see if I’m missing something. We are also trying to buy another property in the bay area.)
3 month treasury bonds are at 2.41% and state tax free.
Mix and match. Depends on your timing.
At this point in the cycle how much under asking are you trying to go to be interested in a property?
For the Hawaii house that has been sitting for three years, I’m offering 25% below asking. It’s kind of insulting, but then again, listing your house for over three years obviously means the house is overpriced.
With San Francisco, 5% under asking that seem OK, since prices have faded since the 1Q2018.
So I guess you’re still bullish on SF real estate? If you’re only bidding 5% under asking, that suggests you don’t see much further downside.
There have been some interesting discussions on the local real estate blog SocketSite (link in name) on double-digit percentage price drops in San Francisco over the past few years.
Yes, long term bullish. SF is still pretty cheap compared to places like Manhattan, HK, London, if we are indeed heading that way. Related: San Francisco Is The Cheapest International City In The World
A lot of prices here are purposefully set low too. But it’s a case by case situation. If prices are down 5%, and pricing is set 2% – 5% below market, and I offer 5% below pricing, we’re talking -12% to -15%, which is what I think is a reasonable price correction before the IPO onslaught.
SocketSite has been bearish since it started 14+ years ago. The founder, was frustrated after his Dartmouth undegrad and Wharton MBA that he couldn’t afford a place, hence the site. Unfortunately, as we all know, SF real estate took off huge, so SS lost a lot of credibility.
It just focuses on the negatives. It could have grown so much more if it had balanced coverage. Alas, the founder’s frustration go the best of him.
What’s your outlook for the SF RE market and why?
Personally neutral on SF RE, if for no other reason than that we are still close to all time price highs, and reversion to the mean is as close to a law of nature as death and taxes.
Other negatives include the new SALT cap, which effectively means that property taxes are no longer deductible for anyone with a reasonably high income. Also the mortgage interest deduction is down to $750k, which doesn’t go far in SF. Personally I’ll be very interested to see what happens to the local RE market after people file taxes this spring; my impression is that a lot of folks aren’t aware of how the changes will affect them.
Hi! I’m looking to buy my first home in San Francisco in 2019 so this article is very timely. I’ve been wanting to buy for a while but keep chickening out. Sam, in previous posts you mention that real estate in SF is at an all time high and it’s not super smart to be buying now. If I’m misquoting, my apologies. I’m pleasantly surprised to hear that you’ve got confidence in SF’s real estate market. But did I miss something? Thanks.
Sure, prices are down from 2018 and I want a bigger house for my family. I’m making below asking offers.
Sam,
True that the home maybe overpriced. Sometime there’s something wrong with the home or the land (movement), not desirable neighbors.
Thanks Sam for this post!! We have been looking for a home in the Bay Area for close to two years now and plan to put a big down payment(close to 50%) once we find one that we really like. Most of our money for our down payment are currently in high-yield savings account so it can be immediately liquid.
And with the housing market over here cooling off a bit, now’s our chance to purchase one. Let’s hope we find one that we really like.
I think you will! Inventory is up at least 30% year-over-year and I think you’re fine a lot more opportunity this year for sure. Good luck!
Great post as this is timely for me. It’s almost like getting a second opinion as I am thinking about buying this year, but being extremely picky given market conditions.
I’m not trying to time a bottom, but at the same time, I don’t want to over leverage myself.
Great insights on this one.
I actually focused on this excerpt up front: “After our house was battle-tested six times with relatives visiting since the birth of our son, we’ve decided it would be nice to have one more bathroom and 300 – 500 square feet of extra living space.”
It reminds me of Tolstoy’s The Death of Ivan Ilyich: “So they began living in their new home — in which, as always happens, when they got thoroughly settled in they found they were just one room short — and with the increased income, which as always was just a little (some five hundred rubles) too little, but it was all very nice.”
Doesn’t it always seem that our current house size is “just one room short” and our current income is “just a few bucks too little”? Such is human nature. :)
Great read – thanks!
DeForest
Indeed. I try to anticipate as much as possible, but it’s hard to know exactly what I want or how things will play out in the future.
Our old house of about 2300 ft.² it would probably be just right, because it does have an extra level where one can escape to.
But the location was on a busy street next to the busiest street in San Francisco. Therefore, I didn’t feel quite at ease with a little one.
We’ve managed to raise a little boy for two years so far in this house, so that works. And one more year would be fine too if needed. But now we have an excess of funds, and our plan is to always keep optimizing our life. Why not.
Currently I am considering the 2-5yr route with medium risk(1/3 each) for a down payment. BUT i am curious how aggressive i should be in saving. I have read your post about recommended saving by income but i live in a LCOL area and i am thinking of moving somewhere more expensive for higher income. How would i plan for this?
I have no idea without knowing your financials.
DINK,
HHI 100k (b4 taxes)
cash 45k
401(k) 32k
COL. 20-25%
House budget 300-350k
Very relevant blog.. Fully agree with this statement “If you do not have between 25% – 30% of the value of the house in cash, you cannot comfortably afford the house.”
In The Netherlands, it is very common to finance 100% of the property. Only requiring payment of fees etc. Not too long ago anyone could finance about 110% of a property. I too, took advantage of that but I worked in an industry where salary increases of 15-20% per year a common.
With the real estate market sky rocketing in Amsterdam etc. every buyer is highly leveraged. This caused me to stay put and pay off my mortgage making use of all the convenient tax free possibilities that The Netherlands offers… Being highly leverage on your own house, providing only utility but no cashflow will set you up for disaster.. Good luck with your search for an upgrade!!
Ah, love Amsterdam. It is like the San Francisco of Europe in a city that I would love to live in for six months or year. What is causing the prices to do so well there? What can you get for million US dollars?
Yes, Amsterdam is great. But a lot of Dutch people and expats think so as well :) Housing inventory is very, very low in and around Amsterdam. Together with the influx of expats, Brexit and the low interest rate environment, prices have increased significantly.
Friends who bought a relatively small apartment in a nice part of Amsterdam for USD 250.000 3 years ago, could now sell it for almost double.
For let’s say EUR 1.000.000 so about USD 1.100.000 you could buy a nice ‘Grachtenpand’, a 2 bedroom apartment, next to the canals in the center of Amsterdam. Built in 1904, fully renovated and up to standard.
This is a nice example:
I fully agree to be really fortunate to live in The Netherlands.. It has an international vibe with a small town feel. But hey, I would take Honolulu over Amsterdam anytime ;)
For anyone who’s living in a high-tax state and having trouble saving for their downpayment, one tip for “supercharging” your ability to save for a downpayment is max. out your 401k and then, when you’re ready to go into contract, take a $50k loan from your plan for purchase of a primary residence. You’ll need at least $100k since you can only borrow up to 50% of your balance. If your employer’s plan is a good one, they’ll even give you the option to pay back the money over 30 years (in case that’s helpful).
This strategy helps you pay for your downpayment with pre-tax dollars. It does subject you to market risk since the loan proceeds are funding by selling 401k assets. Nonetheless, it is a strategy I found helpful while living in high-tax NYC struggling to save up for my first apartment.
Cheers!
Great article as we were just in this dilemma. We sold a free and clear rental, and are looking for other investments/upgrading our house. We went ahead and paid down our mortgage to 175k (house value of 875), and turned around and opened up a HELOC for 500k.
By doing so, we immediately get a 4% return ROI due to the fact we are on a 10/1 Interest only. We are saving net 1300 a month in interest, which with the SALT caps and new higher standard deduction will have little to no impact on our taxes.
This also gives us a 500k LOC to spend, without having to do contingent offers (we could qualify for 500k down payment + another 1.1 mortgage keeping our existing mortgages open if necessary)
We decided since there is no time table on the perfect buying opportunity, paying down the house and getting the 4% immediate return was the best option. Also there is something to be said about being 2-2.5 years away from owning our house free and clear by 35.
Could you please explain how are you getting 4% ROI?
Absolutely.
Mortgage is 4%, on a 10/1 interest only ARM. Paid down 400k on our mortgage, which lowered our monthly payment immediately $1333/mo. Previously if we paid 3k, aprox $1100 would go to principal, and $1900 to interest. If we pay 3k per month now, $600 will go to interest and $2400 to principal. Yes, we did have the cash in a high yield savings at 2.4%, so the difference is only 1.6%, however by paying down the mortgage, we can take advantage of 401k & deferred compensation plans at work for tax benefits. Also, we were paying tax on the interest earnings, $1333/Mo is a big difference on a net cash flow basis.
We live in California and with the new SALT caps, we loose a big chunk of write offs. For the first time, less debt and taking the standard deduction for a married couple actually looks like the way to go.
The benefit of a HELOC is we still have the funds accessible as an open check book if necessary. Due to our 20% LTV prior to the HELOC, even if values come down, we will still have a lot of equity to tap if desired. With rates being low, if we do use the money we can always refinance into another ARM or fixed rate if necessary. Gives us flexibility.
One big benefit of the ARM I/O is the immediate return if you pay the principal down, it’s immediate return.
Which banks offer a interest only loan?
Buying a house is a big deal! They don’t come with return policies. :) smart list of tips for what to do with the money allocated for a down payment. With something as important and momentous as buying a house protecting all that money you’ve worked so hard to earn makes so much sense.
If there ever was a post you’ve written which speaks directly to me, it’d be this one. Kudos to pulling this together. I’m very happy to hear your thoughts on the matter and see they more-or-less coincide with our current actions for buying a house in the coming 2 years.
Our asset allocation is roughly in line with your 75/25 split and we hope to transition this closer to 90/10 as the year progresses and eventually to 100 cash/Treasuries. This housing fund will hopefully account for a 25-30% down payment amount when we do decide to begin making offers on homes.
The 5-10% cash buffer you suggest on top of the home down payment is a minimum for us as well. Given our intended timing, places where we are in our careers, and savings rate, I feel fairly certain knowing we can accomplish all of these goals.
Sounds like you’ve got a good plan! Well done. Buying a house in a year or so could be pretty good timing as inventory ramps up right now.
It’s more than just numbers, so here’s a question.
What is the probability that you and your wife are psychologically prepared to give up your Mainland abode and move permanently to an Outpost in the Pacific?
High. We love to live in both cities and will have two homes. It’s the benefit of owning a relatively inexpensive home in SF.
The ideal scenario is Honolulu-SF-Lake Tahoe given we are free to travel.
Travel op[tions decline quickly as your Tenor nears preschool.
Home school? We figure 3 months during the summer and one month during the winter is more than enough travel time for us. I don’t really like traveling for more than two months a year.
Hmmmm -Four months traveling — Interesting idea, which does not seem to completely align with my most recent preschool experiences. You would accumulate a lot of frequent flier miles – that’s good.
We home school three young kids largely for travel and life flexibility.
We spent one summer (months) going from town to town in Western Colorado. The kids still remember it. We also visited the West Coast (Portland to LA), Wyoming, and Montana.
It can be done and enjoyed, but it does have ups and downs.
re: The ideal scenario is Honolulu-SF-Lake Tahoe given we are free to travel.
Sounds like a wonderful scenario for your family.
See? That Lake Tahoe property purchase will pay off after all. Now you no longer need to regret buying it before its price tanked even more. ;)
Thanks. I think.
The good thing about time, is that it makes a lot of things better. As you grow older and wealthier, your financial mistakes become a smaller percentage of your overall wealth.
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