Gut check on down payment cash

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Topic Author
richard_texan
Posts: 7
Joined: Sun Feb 11, 2018 12:58 am

Gut check on down payment cash

Post by richard_texan » Sun Dec 01, 2019 8:40 pm

I'm looking to park my cash for a down payment (mid 6 figure sum - I live in coastal CA). Looking to buy in the next 1-2 years. Live in CA, around 400k income w/ spouse.

The advice I'm hearing on BH is not to buy any investments that are longer than the time period in which I will need the money. That makes sense to me, I am staying away from the longer term muni bond / treasury ETFs (someone chime in if they feel otherwise)

So then the options are s/t treasuries, CDs, savings accounts, MM. Right? I'm going to throw out CDs because I don't really want to lock up the money.

So ... I surprisingly haven't been able to find anything that can beat a Citizens Access 1.85% APR savings account, even when looking at treasury ETFs and the like. Chasing .1 or .2% more for an intermediate fund, for example, doesn't seem worth the risk (again someone chime in if they feel otherwise).

I am just asking for a gut check since a savings account seems slightly counter-intuitive. Are there higher interest options out there that I'm not thinking about for 1 - 2 year horizon?

retired@50
Posts: 680
Joined: Tue Oct 01, 2019 2:36 pm

Re: Gut check on down payment cash

Post by retired@50 » Sun Dec 01, 2019 8:48 pm

With the recent rate cuts by the Fed, the federal funds rate is now in the range of 1.5% - 1.75%. I agree that this is a bit disappointing for people holding cash. Most folks can't stomach the idea of losing money for a house down payment account, so that is why the common recommendation is to use money market accounts, etc.

Vanguard has a Prime Money Market account - current yield = 1.74% (Ticker VMMXX)

Or for a touch of risk you could use a short term bond fund
Vanguard has the Ultra Short Term Bond Fund with a duration of under 1 year. The current yield = 2.14% (Ticker = VUSFX)

Regards,

Outer Marker
Posts: 357
Joined: Sun Mar 08, 2009 8:01 am

Re: Gut check on down payment cash

Post by Outer Marker » Sun Dec 01, 2019 9:50 pm

richard_texan wrote:
Sun Dec 01, 2019 8:40 pm
... I'm going to throw out CDs because I don't really want to lock up the money...

So ... I surprisingly haven't been able to find anything that can beat a Citizens Access 1.85% APR savings account, even when looking at treasury ETFs and the like. Chasing .1 or .2% more for an intermediate fund, for example, doesn't seem worth the risk (again someone chime in if they feel otherwise).
I also hold a substantial amount of cash in Citizens Access to cover mom's nursing home expenses. Agree its a good deal.

That said, I wouldn't rule out a 12-18 month CD if you find a good rate and that fits with your time horizon. Read the fine print, but your money is almost never really "locked up" in a CD. You'd pay a small penalty to take it out. Maybe on the order of $50 and half the interest earned. But, you do in most cases have access to your money if you need it.

random_walker_77
Posts: 836
Joined: Tue May 21, 2013 8:49 pm

Re: Gut check on down payment cash

Post by random_walker_77 » Sun Dec 01, 2019 10:36 pm

Ditto, CD's with a nominal early withdrawal penalty are worth considering if the interest rate is right. That said, a savings/checking account paying ~1.8% is about right, and hard to beat w/ short term bonds/CDs, or tax-exempt money markets

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Cubicle
Posts: 135
Joined: Sun Sep 22, 2019 1:43 am

Re: Gut check on down payment cash

Post by Cubicle » Sun Dec 01, 2019 10:57 pm

A couple local banks are always advertising no-penalty CDs.

Pawpatrol
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Joined: Sun Sep 24, 2017 5:21 pm

Re: Gut check on down payment cash

Post by Pawpatrol » Sun Dec 01, 2019 10:58 pm

I used shortterm treasury fund in similar situation and held it there for 1.5 years. You dont pay ca state tax which in your bracket is at least 10.3%. Scho from schwab is very liquid (bid ask spread less than 1 cent) or vanguard has a fund as well. Duration is about 2 years so it matches your timeline. I ended up coming out way ahead because 2yr dropped from 3% to 1.5% which made it a big win vs MMF. I figured it was worth risk vs MMF because if lost money I could TLH and if the market crashed it would be a double silver lining, yields would likely drop causing fund gains and likely cheaper housing prices.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Gut check on down payment cash

Post by HomeStretch » Sun Dec 01, 2019 11:13 pm

If you have a high state tax rate, your tax equivalent yield may be higher if you use Vanguard VUSXX Treasury money market fund. VUSXX is state tax exempt.

Topic Author
richard_texan
Posts: 7
Joined: Sun Feb 11, 2018 12:58 am

Re: Gut check on down payment cash

Post by richard_texan » Mon Dec 02, 2019 1:47 pm

retired@50 wrote:
Sun Dec 01, 2019 8:48 pm
With the recent rate cuts by the Fed, the federal funds rate is now in the range of 1.5% - 1.75%. I agree that this is a bit disappointing for people holding cash. Most folks can't stomach the idea of losing money for a house down payment account, so that is why the common recommendation is to use money market accounts, etc.

Vanguard has a Prime Money Market account - current yield = 1.74% (Ticker VMMXX)

Or for a touch of risk you could use a short term bond fund
Vanguard has the Ultra Short Term Bond Fund with a duration of under 1 year. The current yield = 2.14% (Ticker = VUSFX)

Regards,
I wasn't aware of VUSFX but I am going to stay away from corporate bonds, I think the risk is way too high on those at this point. I'm fully convinced that there's going to be a corporate bond reckoning soon.

Even at a 10% tax rate, VUSXX ends up ends up at 1.85%. I guess the advantage of that one is if rates go up, it might adjust the rate faster than the savings account. But so far Citizens have adjusted the rate pretty quickly after rate changes (faster when down than up though :)

I will look into CDs without penalties and do that or the savings account. Thanks all!

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