House Downpayments and Low Interest Rates: Keep Your Eye on the Prize

My neighbors put up their house for sale a couple weeks ago. A single open house, what felt like over 100 private showings, and in escrow within a week. So when I read this WSJ article Where to Stash Your Down Payment if You Didn’t Buy a House This Year, I felt their answer was too wishy-washy and complex. If you are looking for a house, as in – if the right one came up you would buy it – then keep your downpayment in 100% liquid and safe cash. Simple.

Keep your eye on the prize: The house + a 30-year fixed mortgage at 3%. Best quote from the WSJ article:

As Blair duQuesnay, a financial planner at Ritholtz Wealth Management, points out, there is another upside to waiting longer to buy: You can grow the original amount by ramping up your savings. “If they’re still earning, that could add to the down payment,” she said. “And the low interest rates we’re all complaining about? That’s how you’re going to get a low mortgage rate.”

Exactly. Don’t complain about earning a low interest rate on your downpayment for perhaps 12 months. Be grateful that you’ll get a low fixed interest rate on your mortgage for the next three decades! A lot can happen in that timeframe, look at the past 50 years (via @lenkeifer):

Don’t forget that the American 30-year fixed mortgage with no prepayment penalty is an amazing product that would not exist if not for government intervention. It’s an awesome inflation hedge. If you don’t move (or even if you move but don’t sell), your mortgage payment is fixed for 30 years, no matter how high inflation gets. Mortgage rates are at historical lows, but even if rates do somehow go even lower, you simply refinance. You are covered either way!

According to this LendingTree study, the average downpayment across the nation’s 50 largest metros is is $46,283. The lowest is $28,000 in Oklahoma City, and the highest is $115,138 in San Jose. That’s roughly 10% of the average home prices in each area. FHA loans require a down payment of just 3.5%.

$50,000 is a lot of money (although many people drive around in cars worth more than that….) but your time horizon is very short when house shopping. Home buying is an emotional roller coaster in the best of times, and inventory is tight. There were over 30 offers on the house that we bought, and we couldn’t sleep until our offer was finally accepted. I’m not interested in the buy vs. rent debate, as there are too many personal and local variables for there to be a single answer. If I was in the market right now, I’d have all my ducks are in a row – mortgage pre-approval, downpayment documentation, income documentation, clean and orderly bank statements, and so on.

Long-term investments and short-term investments should be treated differently. For your house downpayment, don’t worry about the stock market going up another 10%. Don’t buy risky bonds chasing another 2%. Worry that messing around with your downpayment will somehow impair your ability to buy the home that you want. If earning zero interest bothers you, check out my best rates and earn 1% to 3% APY while keeping it 100% liquid and safe. Good luck!

Image credit: Imgflip