How can I grow my savings for a down payment?
My fiance and I are beginning to save for a house. We're considering our starter home as an investment towards a house that we can live in long-term, raise a family in, etc. The problem is that in our area, housing prices are astronomical. Coming up with a down payment large enough to avoid PMI and afford the monthly payments is tough. We've saved about $30,000, and bring in a steady $112,000 combined a year with our salaries. Our target for a down payment is $200,000, but it seems like it'll take years to get there while still paying rent. Are there any ways other than the standard high-yield savings accounts and CDs that can help us grow our savings in a matter of two to five years?
Normally the recommendation for funds to be used for a downpayment would be to utilize conservative investments and not risk capital. In order to obtain the rates of return necessary for you to accomplish your goal you have to take stock market like risk. The challenge is that if the stock market goes up significantly as you need, that would generally mean that the underlying economy has done well and overall prices have increased including the price of that starter home. If you believe that your income will continue to rise and you have a promising employment future you may look to borrow money from your 401k account or utilize funds from your other retirement accounts for the first time buyers exemption on penalties. I don't like doing that personally because you are shorting your future retirement. Another consideration is to look at a townhouse or condo that may allow you to get your foot into the property ownership market so that you can continue to save money and assuming prices continue to go up your property should help you with appreciation that you could sell and use toward what you really want. No quick or easy fix here.
Great question, and I have a few younger clients in the same boat as you. In today's market it's tough to safely earn more. Bonds are at risk with interest rates moving higher, and equities have been very volatile lately. There is a possibility that home prices will depreciate or at least slow their rate of appreciation, but depreciation will take a couple of years or more. You could look at some lower volatile ETFs like CDC or SPLV, but again your principal will be at risk. If you do look to invest then consider the Robinhood app, because you're using a taxable account and they don't charge you transaction fees which will be helpful.
You could also consider paying your PMI up front. When doing this there is an assumption that home rates will continue to rise at current rates and the bank calculates how long you would be paying PMI until you have 20% equity.
Sorry I couldn't be more help, but good luck to you!
Matt Ahrens, CIMA®
Sadly given the risk level you are likely to take for these funds I would not suggest anything short of a high yield savings account. The question that jumps off the page to me is if you are looking to purchase a home and not pay PMI (meaning 20% down) are you really looking at homes valued at a million dollars? If so I would strongly caution that I don't think having a $800,000 mortgage on $112,000 income is a viable solution. Something to note is you can put down less than 20% and pay off PMI when applying for a mortgage. Talk to a mortgage specialist as they should be able to help guide you there. Again I'd caution the cost of the house and fear being house poor.
This probably isn't the answer you are looking for, but using a CD or a high-yield savings accounts is probably the best place for that savings. Because that money will be used in the next 2 to 5 years, preserving that principal is your primary goal. All other investments (i.e. stocks, bonds, mutual funds, ETFs, etc.) come with too much risk for your particular situation. Additionally, the likely gain (depending on market performance) probably wouldn't make that much of a difference in the end.
My advice to you is to just keep moving forward, save as much as you can by cutting expenses and maximizing your earnings.
I hope this helps! Good luck to you!
This is a great question and just know you aren't alone in facing high-cost housing prices!
If you don't plan on living in the home through mortgage completion(30 years typically), you could always put down less and just pay PMI insurance. If you're dead-set on putting $200,000 down to avoid PMI, you should consider some equity investments.
The general rule here is if your goal is less than 3 years away, you wouldn't want to expose the money to the stock market. If you're leaning more towards the 5 year goal mark, you should feel confident in investing the money to get some more growth. If a recession does come along, you have time to bounce back and still meet your goal.
Just remember, 8% is the 100 year average return for a basket of stocks(S&P 500). That's a good starting point for talking about investment returns, but they can vary quite a bit, especially with shorter goals.
Hope this helps!
Chance Butler - Intelligent Investor