Downpayment for the next house

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porfolio0001
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Joined: Sun Dec 01, 2019 2:51 pm

Downpayment for the next house

Post by porfolio0001 » Sat May 23, 2020 9:19 pm

Hi,

We are thinking of buying a new house for a primary residence. It might take 1 or even 2 years to find it. The current house is payed off at 50%.
Talking to the mortgage agent, I will need to get 20% downpayment for new house (jumbo loan). Only 3% downpayment is needed to make an offer. We plan to either sell the current house later, or perhaps keep it and rent it. I've already collected ~20% in cash.

Question: Should I keep it in cash so that it is available at any time, or invested it as part of the portfolio, and sell when needed?

I've heard there are some options on getting a temporary loan toward a new house until the sale of an old one. If it was available, I could use the cash to pay down the current mortgage.

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grabiner
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Re: Downpayment for the next house

Post by grabiner » Sat May 23, 2020 9:38 pm

Since you have money you are intended to spend within a year or two, it should be in a low-risk investment, such as a high-yield savings account or a short-term bond fund. If you invest it in stock, you run the risk that the stock will not have the value you need when you decide to sell it.

While you could get a bridge loan (a loan against your old house while waiting to sell it so that you can buy your new house), that would likely be more expensive than the current mortgage rate. Thus it is probably worth keeping enough cash to make the down payment, rather than the small benefit of paying down your current mortgage.
Wiki David Grabiner

The PA Investor
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Re: Downpayment for the next house

Post by The PA Investor » Sat May 23, 2020 11:14 pm

I absolutely agree. You can get 1.40% interest using Simple as a high yield savings account. I don't think most money markets or CD's will give you that plus the liquidity. If you really want you can buy T-notes to save a little bit on taxes but I would personally just stick with the high-yield savings account. There's a few you can choose from. I use Simple because it was the highest I could find right now but Ally banking is pretty popular too. I think it's about 1.35% interest so it's not much different.

SteveJones
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Re: Downpayment for the next house

Post by SteveJones » Sun May 24, 2020 8:21 am

High yield savings accounts seem to be a no-brainer in the current interest rate environment. One of the affects of the Feds cutting the rate is CD rates followed. Where I typically get my CD's from the rates are half of what they were in February and less than a good savings account.

Like any other investment if you are willing to accept some risk I'd suggest placing some portion in savings and some in an index fund. I am in the middle of a 3-4 year savings period for my next house as we rent (current orders are a split tour so I am not in a location for more than a year so buying was a non-starter) and we put half in CDs and half in a taxable account. My plan was to take the money out just before the election causes the market to go crazy. We were making decisions to improve our tax position to cover the taxes we would pay to take it out and then COVID-19 happened. We took advantage of the market plunge to convert some traditional IRA money to Roth (Did it on 23 March for quite a discount!). We now have to delay withdrawing the taxable account until next year which is fine because that is when we are buying.

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porfolio0001
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Re: Downpayment for the next house

Post by porfolio0001 » Sun May 24, 2020 3:32 pm

Thank you for your responses.

I had a half of the downpayment in VUSXX. It looks like that even for my high tax bracket it make sense to move it to high-yield savings?

Would you recommend any short-term bond funds, preferably tax efficient.

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anon_investor
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Re: Downpayment for the next house

Post by anon_investor » Sun May 24, 2020 3:39 pm

porfolio0001 wrote:
Sun May 24, 2020 3:32 pm
Thank you for your responses.

I had a half of the downpayment in VUSXX. It looks like that even for my high tax bracket it make sense to move it to high-yield savings?

Would you recommend any short-term bond funds, preferably tax efficient.
You are probably better off with a no penalty CD.

Ally Bank has an 11 mo no penalty CD for 1.25% right now:
https://www.ally.com/bank/no-penalty-cd

Marcus has a 7 mo no penalty CD for 1.30%:
https://www.marcus.com/us/en/savings/no-penalty-cds

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