House Savings Account?

[Frenchy1011]

Hey all,

So I will soon be initiating a new account to start saving for a house downpayment. My plan is to save $100,000 over a 7 year period by putting a certain monthly contribution that is relatively stable over those 7 years.

My question is what type of account should I start for this? Savings account with 1% interest rate? A CD? Something else? It obviously needs to be liquid at the end of 7 years. This will be completely separate from my retirement accounts. I currently have all the general retirement accounts up and running (403b, 457b, HSA, Roth, Taxable) and would kind of like to keep those separate from this house down payment account.

Thoughts? Thanks!!

[adventure]

Given a typical physician cash flow, 7 years seems a long time to get a down payment. That's saving $1,190.48 a month. (slightly less if you factor in the interest growth, say 1%).

There are 0-5% physician loans, or I'd think you'd likely have the cashflow to get a 20% downpayment (100k - 500k house?) in much less than 7 years. Seems like a long time. I suggest reconsidering the timeline, but really suggest ensuring saving $1,190.48 a month in this manner is really the best financial option to help you hit your goals. If it is, great!

A "high interest" savings account @ Ally/BBVA/Synchrony, etc might be a good option, we did this when saving for our last down payment. Most of them have been raising interest rates over the past year. Johanna has some posts on bonds, which might also be of interest. Perhaps a CD, but I've never liked them, for anything. Personal bias, I think. Probably a reasonable tool to consider here.

[Frenchy1011]

Yea I am planning on a 20% down payment. Planning on moving at age 40 to our "forever home", so essentially putting the most time and years towards saving for this so I can put all the other money I have towards retirement instead. And I am a FP so not making the kind of big bucks specialists do

[jfoxcpacfp]

Agree with adventure - that seems like an awfully long time to save $100k, at least for a physician. Our rule of thumb is to keep funds you'll need in the next 5 years liquid and that is usually the outer limit of a savings goal for a down payment (I would say 3 years is the average). On second thought, are you saying you'll save $100k/year over 7 years? $700k?

But to answer your question...given the above, I'd be tempted to advise you save part of the money in a portfolio of 70:30 US stock:int'l stock index, say 2 or 3 years' worth. If the market is down when you're ready to buy, will you have any flexibility? Such as waiting a year or borrowing more on a doctor loan until you can liquidate?

Absolutely, you should keep the retirement accounts separate from your house downpayment account.

[Frenchy1011]

No I'm saving 100k Total. I am an FM physician making 175k yearly and am already saving 35% of gross income to retirement, so don't have tons of wiggle room for extra savings. I was planning on drawing out the savings years for the house as long as possible so that the monthly savings is relatively low and I can continue to put everything I can into retirement. When you talk about the 70/30 mix, is that in a taxable account? One that is separate from my current taxable account? Or where would that be held?

[Zaphod]

I'd say this is where you should do the math. What is the actual difference between a down payment and a higher mortgage? How much will you be losing to inflation over this time, how much will this 500k house cost then?

You can save up for 7 years and put the large down payment up, or you can buy much sooner and accumulate that down payment while living in the house and benefit from any appreciation, tax write offs and inflation in your favor. I really dont see much benefit to waiting so long when the realities of the cash are really straight forward.

500k home, 20% down.

PITI: 2184

500k home, 5% down (20k).

PITI: 2934

Difference is 750/month and to not have 80k (222/mo/360 months) up front. 300ish is pmi which will go away in 7-8 years (68 months @0.9% appreciation). You are essentially accumulating your down payment while living in the house and obtaining the tax/any appreciation/inflation/life benefits while being there.

You can see that your 1000/mo savings is made up for by the cost of being in the house at the same time earlier in the payment. Its just where it goes and fringe benefits. Its possible but far from guaranteed to end up ahead due to taxes/inflation/appreciation going in your favor by being earlier.

[jfoxcpacfp]

Zaphod wrote:

I’d say this is where you should do the math. What is the actual difference between a down payment and a higher mortgage? How much will you be losing to inflation over this time, how much will this 500k house cost then?

You can save up for 7 years and put the large down payment up, or you can buy much sooner and accumulate that down payment while living in the house and benefit from any appreciation, tax write offs and inflation in your favor. I really dont see much benefit to waiting so long when the realities of the cash are really straight forward.

500k home, 20% down.

PITI: 2184

500k home, 5% down (20k).

PITI: 2934

Difference is 750/month and to not have 80k (222/mo/360 months) up front. 300ish is pmi which will go away in 7-8 years (68 months @0.9% appreciation). You are essentially accumulating your down payment while living in the house and obtaining the tax/any appreciation/inflation/life benefits while being there.

You can see that your 1000/mo savings is made up for by the cost of being in the house at the same time earlier in the payment. Its just where it goes and fringe benefits. Its possible but far from guaranteed to end up ahead due to taxes/inflation/appreciation going in your favor by being earlier.

Click to expand...

That was an AWESOME response.

[jfoxcpacfp]

Frenchy1011 wrote:

When you talk about the 70/30 mix, is that in a taxable account? One that is separate from my current taxable account? Or where would that be held?

Click to expand...

Yes, that would be a separate taxable account, but see  Zaphod's comments.

[Frenchy1011]

Thank you for this response. Very informative. Gonna have to sit on that for a while haha. Sounds like by getting into the house earlier and only putting 5% down I would essentially come out better in the long run. Or I guess another way to look at it would be if I still want to move into a new house in 7 years or whatever number it is, to delay the savings to a point where I only get 5% down payment and use the savings that I wouldn't needed for the 20% on something better like throwing it towards retirement etc. If that makes sense.

[StarTrekDoc]

Zaphod hit it right on the nose. Get into your house sooner than later pays for itself in almost all cases.

The drawback or hesitation to lurxhasr is if you don't KNOW the circumstances around the purchase....job, size, location. If you know as certainty permits, in most cases ownership beats rental.

[hightower]

Are you currently renting or do you own another house/condo?

Do you really need or want to move right now?  If you were originally ok with a 7 year timeline, then I would assume you are happy where you're at right now? If that's the case, I wouldn't move until you feel like you're ready.  Also, will the new house mean bigger monthly payments for you?  If so, I wouldn't rush into it.  Remember, a house is more expensive then just the minimum monthly payments that you'll owe on the mortgage.  You're able to save 35% of your current income for retirement.  I would encourage you to keep doing this since you're still relatively young.  Now is the time to be pouring as much as possible into retirement accounts. I would only consider moving if you would be able to maintain or increase your current savings rate.

[Golfing Doc]

I am/have been in a similar situation. Tough decision on whether or not to upgrade housing or move in to a forever house. Only you know how comfortable you are or will be with your current employer and how good or bad your savings habits are

One additional item to zaphod's response. If you go with a physician's mortgage, there won't be any PMI, which will save $200-$500 a month. Use wci's list of physician mortgage available in your state and shoot each an email asking them for their rates and see who is willing to beat another's rate.

[hightower]

Zaphod wrote:

I’d say this is where you should do the math. What is the actual difference between a down payment and a higher mortgage? How much will you be losing to inflation over this time, how much will this 500k house cost then?

You can save up for 7 years and put the large down payment up, or you can buy much sooner and accumulate that down payment while living in the house and benefit from any appreciation, tax write offs and inflation in your favor. I really dont see much benefit to waiting so long when the realities of the cash are really straight forward.

500k home, 20% down.

PITI: 2184

500k home, 5% down (20k).

PITI: 2934

Difference is 750/month and to not have 80k (222/mo/360 months) up front. 300ish is pmi which will go away in 7-8 years (68 months @0.9% appreciation). You are essentially accumulating your down payment while living in the house and obtaining the tax/any appreciation/inflation/life benefits while being there.

You can see that your 1000/mo savings is made up for by the cost of being in the house at the same time earlier in the payment. Its just where it goes and fringe benefits. Its possible but far from guaranteed to end up ahead due to taxes/inflation/appreciation going in your favor by being earlier.

Click to expand...

I'm not arguing with your math, but as you mentioned it's "possible but far from guaranteed to end up ahead..."  Another 2008-like housing market crash during the next 7-8 years could make him wish he would have waited.  The benefit of waiting and saving cash is that you might get a big discount on your house if you wait.  Of course, there's no guarantee of that either.  The only argument I would buy for moving now, would be one that involves selling your current house if the price is better than expected due to current real estate conditions.  But, I don't know if he owns a house or not.

[Zaphod]

hightower wrote:

Zaphod wrote:

I’d say this is where you should do the math. What is the actual difference between a down payment and a higher mortgage? How much will you be losing to inflation over this time, how much will this 500k house cost then?

You can save up for 7 years and put the large down payment up, or you can buy much sooner and accumulate that down payment while living in the house and benefit from any appreciation, tax write offs and inflation in your favor. I really dont see much benefit to waiting so long when the realities of the cash are really straight forward.

500k home, 20% down.

PITI: 2184

500k home, 5% down (20k).

PITI: 2934

Difference is 750/month and to not have 80k (222/mo/360 months) up front. 300ish is pmi which will go away in 7-8 years (68 months @0.9% appreciation). You are essentially accumulating your down payment while living in the house and obtaining the tax/any appreciation/inflation/life benefits while being there.

You can see that your 1000/mo savings is made up for by the cost of being in the house at the same time earlier in the payment. Its just where it goes and fringe benefits. Its possible but far from guaranteed to end up ahead due to taxes/inflation/appreciation going in your favor by being earlier.

Click to expand…

I’m not arguing with your math, but as you mentioned it’s “possible but far from guaranteed to end up ahead…”  Another 2008-like housing market crash during the next 7-8 years could make him wish he would have waited.  The benefit of waiting and saving cash is that you might get a big discount on your house if you wait.  Of course, there’s no guarantee of that either.  The only argument I would buy for moving now, would be one that involves selling your current house if the price is better than expected due to current real estate conditions.  But, I don’t know if he owns a house or not.

Click to expand...

That is a definite risk, but much depends on his particular market as well. Its likely a lower risk than it being slightly more expensive at that time, even with a normal small recession and dip that could be expected within that time frame.

Everythings a trade off, no guarantees.

[Frenchy1011]

I do currently own a house, and we are definitely happy in this house. I am 30yrs old, and essentially don't plan on moving until closer to 40. Now if that's 37 or 40, it doesn't really matter, but definitely not moving now. When I start saving for the house, it will not affect my 35% savings rate, it will definitely be above and beyond that. My current mortgage is $1500 monthly on a 225k mortgage. I currently have a physician mortgage with a 3ish% rate. Just trying to plan out the next 10ish years as much as possible.

Still sounds like maybe delaying my start for housing savings and putting all I can into retirement until maybe 3-5yrs before I think of moving, and then not saving much more than 5% downpayment?