Where to Hide the Down Payment If You Are Waiting for the Housing Market Crash
All potential homeowners are faced with the same conundrum when it comes to the down payment on their potential new home: money should be available quickly during the home buying process, but by keeping that money in cash, you are losing potential profit from a lesser liquid investment. such as stock or property. So where should you hide your down payment to avoid sacrificing profit? Here’s a look at your options.
Liquidity is key when it comes to upfront payments
If you are planning to buy a home within a year, financial advisors usually advise keeping your savings for a down payment in some kind of low-risk cash account. This is for two reasons:
- Liquidity: You should be able to withdraw the amount very quickly when buying a home (sometimes within a few hours).
- Risk Exposure: You can risk losing most of this money if it is associated with riskier investments such as the stock market.
As Insider Molly Stanifer, financial advisor to Old Peak Finance, explains to Insider , “It’s better to give up the expected return on investment so you have money available when you want to buy your home than to miss out on overly aggressive investments or your own money. is not liquid. “
Unfortunately, this means dropping the stock market’s average annual rate of return of 10% in favor of something close to 0.5% with savings accounts. This does not mean that you could not keep this money in a brokerage account if you wanted, but you will not be able to withdraw this money as quickly as cash, and you will expose yourself to increased volatility in the stock market in the short term. (For example, at the start of the pandemic, the S&P fell 34% in just over a month.)
Where to put money
The safest place to keep money is in your cash account. When it comes to interest rates, they are all roughly the same: not generous.
- High Yield Savings Accounts: Most people are already familiar with savings accounts, making them the easiest place to store your down payment. Interest rates are low – about 0.5%, but they are usually better than those offered in regular checking accounts and the money is still easy to withdraw.
- Money Market Accounts: These are similar to hybrid checking / savings accounts, although you are only allowed a few transactions per month (which doesn’t really matter if the money is for one big transaction like buying a house). These accounts can offer APY closer to 0.6% , which is comparable to high yielding savings accounts.
- Newbie Savings Account: Some states offer savings accounts with slightly higher interest rates and special tax breaks that vary from state to state. These programs are currently offered by Alabama, Colorado, Iowa, Idaho, Minnesota, Mississippi, Montana, Oregon, and Virginia. Click here for more information.
Apart from the cash accounts described above, the low risk and liquidity options are quite limited. Time is also an important factor. Again, you can still invest your money in stocks or mutual funds through a brokerage account, but advisers usually only offer this if you are willing to take the risk and are several years away from buying a home, not active. purchase.
What to do if you are waiting for the market to crash
However, according to the Wall Street Journal , some home buyers are in limbo as they are willing to wait 12-18 months for home prices to fall. In this case, some of them have adopted a hybrid approach, in which part of their down payment is invested and the rest is saved as savings. Another option, of course, is to simply package it up and reinvest that money until the market becomes more favorable. Whichever you choose, consider working with a financial advisor first who will assess your risk tolerance so they can help you choose all of the options.
Bottom line
Since timing and liquidity are an important part of the home buying process, you may have to sacrifice growth for safety when it comes to your down payment on a new home. If you are planning to buy a home in the next few months, financial advisors usually recommend that you deposit your down payment into a cash account that offers the highest possible interest rate. If you have more time, you have more flexibility.