Where to put my Mortgage down payment savings

glavinsoloFebruary 29, 2008

Hello all,

Not sure if you remember me but I had a lot of debt last year at the time my wife and I were going to get married. Well I didn't eat out, didn't buy an hdtv, had basic phone and internet and I was able to scrounge together 2100-2500 a month to apply towards my debt. Now I need to find a sanctuary for this 2100-2500 a month that will now be building up for a down payment on a house.

I am with USAA and they have MFs and MMAs that I can just drop this money into. The money will ultimately be saved for a total of 2-3 years and I basically need to get a decent rate and fight inflation. Goal is 60k. I assume the answer to my question is just put it into the most conservative investing account but I'm looking for more alternatives in this volatile market.

I will in effect be dropping approximately 2500 a month into some savings vehicle for a down payment.

If anyone has an argument as to why I should just do a 5/15/80 vs. saving 20% I'm open to hear it.

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Since your time frame is fairly short, I would put it into the best money market fund you can find. Our emergency money is in a money market account that currently is paying 3.6%

    Bookmark   February 29, 2008 at 2:59PM
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Hi again, glavin-no-longer-solo,

It seems to me that I do remember your messages here, some time ago.

First, my congratulations on having got your financial house in much more order than earlier. It takes some common sense and backbone to decide that it's necessary, then to start working on how to develop a plan of solution and get to work on implementing it.

Congratulations, also, though rather belated, on this new relationship into which you have enetered.

I hope that the privations that you've endured in getting your financial situation improved haven't done damage to your relationship.

Now ... you're starting working on getting a real house.

It may well be a good idea that you won't be planning to buy for a while, for you'll have that much longer to get to know one another better and have time to plan what you hope to have in a house, negotiating various differences of opinion as you proced.

You spoke of aiming at a 2 - 3 year time-frame.

I approach this situation from a long horizon, being out of country. I wonder whether the housing crisis is deeper than they've been letting on. With the number of walk-aways and foreclosures that have been appearing, it may take some time for the surplus to find enough people who, though they want to buy, can't actually make the grade, financially.

There may be fewer trying to buy a house with very little but blue-sky backing, trusting that they'll be able to sell after a fairly short time, if things don't go well, for some profit, as we've seen deteriorating prices recently.

And if some of them try, but fail within a reasonably short time-frame, that house will come back on to the surplus market - but it might not be until the worst of the surplus has been worked out of the system.

One should remember, too, that our middle class group has been eroding for some time, and that trend continues.

My daughter wanted to buy a residential place in Phoenix less than a year ago and there was a $5,000.00 difference between them. Neither would budge (perhaps daughter takes after her father a bit, for stubbornness).

She returned to Toronto, where she's been living for several years (spent several years in Phoenix, a few years ago).

A few months later, she reported that there'd been a revision of the estimated value of the unit that she was considering - down $20,000.00.

I've been suggesting that she sit on her money, not get in a hurry to make a down payment. Watch the housing market closely - she's back in Phoenix now.

While the stock market is usually volatile after a fairly severe downturn, making several upturns, then falling back again a few times before it sustains that upward move, I don't know whether the housing markets tend to follow a similar pattern.

I expect that you will read another thread started here just now, relating to the banking crisis, suggesting that it may be much more serious than we have seen, so far (FDIC taking on more staff, recalling some retired guys, maybe some who experienced the S & L crisis of 30 years or so ago).

I have had some funds accumulating in MM and bank accounts and have bought some stocks three times recently, plan to buy some more over the short term and will likely borrow to buy more as the downturn continues.

One of my holdings (based on Canada's largest phone co.) is about to undergo forced liquidation, being in the process of being bought out and taken private, so that will provide more cash in a few months time.

Often there is a substantial rise over a reasonably short term in the stock market after a downturn such as we have seen in recent months.

The financial crisis may cause the current downturn in that field to be prolonged, as well.

I have a bias toward owning stocks.

I think that in a position such as yours, despite financial advisors' (including mine) ongoing recommendation that people not buy stocks with less than a 5-year horizon, 10 years being better, I'd be inclined to put some of those funds into well-chosen, quality stocks.

The main kicker being that if, instead of selling them over the short term, I go to a lender in a few years to use them as collateral for a loan to use for down payment on my house purchase, if I have $10,000. worth of stock, they won't lend me more than $5,000.

Not only that, that loan that I'm making may make some mortgage lenders more unwilling to issue me a mortgage, or if so, they may want more stringent conditions (higher rate).

On the other hand ... perhaps the stocks will be in recovery by the time that I want to buy ... if they have recovered 10 - 20% or so, that moves the 50% loan limit a bit higher.

The quality stocks usually pay a decent dividend, but that will only pay part of the interest cost of the loan.

In addition, should those stocks gain up to 40 - 50% or so over three, four ... or even five or six years, you won't be crying the blues.

And should you feel an ongoing uneasiness about the housing markets that persisted anything like that long, so be unwilling to commit to a home ... you'd be pleased with that situation, as well.

And here's another ... is there any possibility that your income might be in jeopardy? Suppose you get worried about your job, should these crises become prolonged. Some stocks are easier to liquidate, and can be done serially (plus you have much lower total exposure) than would a house.

Bear in mind that I usually suggest that people plan to own stocks, whether directly or through mutual funds, for five to ten years, when they plan to purchase them.

Another possibility might be to buy some foreign shares or Exchange Traded Funds with part of your investable funds, for many feel that the slide in value of the U.S. Dollar has not run its course.

Had you bought Canadian Dollars to buy Canadian stocks 5 - 7 years ago, 65 - 75 US cents would have bought CA$1.00.

Quite likely well-chosen stocks would have grown, and paid some dividends, in the meantime.

And, should you choose to sell them now (though I don't know why you would) for each CA$1.00 of their worth ...

... you wouldn't get 65 - 75 US cents - you'd get US$1.00. That's an increase of a third to a quarter (or more) on your asset due to exchange.

Just some food for thought, as you move forward with your plans.

ole joyful

    Bookmark   February 29, 2008 at 4:30PM
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Stay away from stocks at this time. The rest of the decade is going to be pretty much a bear market,and altho there will be some rallys in there, don't be impressed.

You can put that money in a money market that has municipals in it. Then you don't have to pay taxes on that portion that is held in municipals. Trying to beat inflation is not possible when it is around 7% and will only go higher. One way to win against inflation is to not be a spender. Spend only on things you need and stockpile cash. By the time we are out of this financial mess, it will be 2010. Maybe you can take advantage of the waning days of lower house prices by then. Most lenders are demanding 20-25% down on a house now--something they should have been doing all along. But they got greedy and threw good lending practices out the window and now we all have to pay. This is what happens when a society values money ALONE above all else--Rome burns.

    Bookmark   March 1, 2008 at 11:38AM
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"The rest of the decade is going to be pretty much a bear market,and altho there will be some rallys in there, don't be impressed. "

Why do you think the above?

    Bookmark   March 2, 2008 at 12:50AM
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I'd put the money in a 3.5% or better CD if I was reasonably sure that it wouldn't need to be withdrawn before the maturity date. Money market rates look about a point and a half lower right now, but would leave you with liquidity if you feel you should maintain that availability.
I also feel that a two to three year threshhold is too short to put your money in individual stocks. It's hard to tell which sector might be immune from the perturbations of the current financial situation. A balanced mutual fund would give you better insulation from market fluctuations, though even that could be at a low point when you want to sell.

Here is a link that might be useful: Ric Edelman

    Bookmark   March 2, 2008 at 9:17AM
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deerslayer--because it's going to take that long to work thru the banking crisis AND rising oil prices that make inflation so spiraling. It will take at least until 2010 to regain footing. You have to be real careful with short-term money during this time. If you have a long time-line, for instance you're in your 20's or 30's, you have these years to buy cheaper stocks thru 401-K's or Roths. So I'd keep doing that. I'm just warning those who have short time-lines not to risk that money in the stock market because they could end up with less than what they have now. CD's or money markets are the way to go for them now.

    Bookmark   March 2, 2008 at 11:19AM
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Green-Zeus, PEs are relatively low now. I'm 57 and it's been my experience that when PEs are this low, it's a buying opportunity.

However, if we elect a Democrat as President of the U.S., you may be right. Both Obama and Clinton want to increase taxes on dividends and capital gains. Either action will negatively impact the stock market. I hope that voters take this into consideration before they cast their votes.

    Bookmark   March 3, 2008 at 2:01AM
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Either action will negatively impact the stock market. I hope that voters take this into consideration before they cast their votes.

I'm more concerned for the world my grandchilden will inherit than for my immediate bottom line.

    Bookmark   March 3, 2008 at 9:31AM
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Yes, it seems like a lifetime ago that a Democratic president gave us a budget surplus, doesn't it?

No matter which party wins the presidency, eventually the decades of postponing the financial piper is going to catch up with us. It's always so much easier to "let the next guy pay for it."

CD and MMA rates are dropping, but the Fed doesn't have a lot of room to keep cutting rates when inflation is running 4% per year.

    Bookmark   March 3, 2008 at 11:35AM
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Low PE's are usually an indication to buy. But it's not always going to translate over into a gain, especially for the long-term INVESTOR. The deck is stacked against true investors because of short selling, hedge funds,people taking profit,and speculators. The stock market has changed even over a 10 year period. It is little opportunity for retired people who have shorter timelines and those with short term money.

Look at GE in 2002. It was 34.00/share. Today, it is less than that. The only gain was the dividend. I was a big-time stock investor for 30 years and for many years, made more in the stock market every year than I good make in my good paying job. What a change today--stocks have turned into too much risk because the market has lost most of its real investors. It's gone more the way of Los Vegas. All I can say is---be VERY careful with the market for the next couple of years. I can only hope that after this crisis has passed, that people will have more a mindset of quality and real value as opposed to being gamblers and worshipping the altar of fast money and "get it while you can."

    Bookmark   March 3, 2008 at 12:46PM
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"Yes, it seems like a lifetime ago that a Democratic president gave us a budget surplus, doesn't it?"

IMO, even though the President prepares the annual budget, Congress really controls spending. The Republican lead Congress of the 1990s achieved the last surplus. Unfortunately, Congress went on a spending spree at the turn of the century. The current Democrat lead Congress is continuing the spending spree and has upped the ante with plans for major new programs such as, "Universal Health Care".

"Low PE's are usually an indication to buy. But it's not always going to translate over into a gain, especially for the long-term INVESTOR."

I believe that PEs are not very relevant to traders but are very relevant to investors.

"What a change today--stocks have turned into too much risk because the market has lost most of its real investors."

Nearly everyone made money in the great bull market of the 80s and 90s. A large number of these people were speculators not investors. They recognized that stocks were increasing in value so they purchased equities. When the stock bubble burst, many of these people closed their brokerage accounts and moved on to real estate.

I think it takes real investors to make money now. Real investors know how to read and interpret income statements and balance sheets. They don't buy stocks, they buy companies. They know that sometimes it can take the market several years to recognize the true value of a company. Real investors have made above average returns in the stock market since 2002.

    Bookmark   March 4, 2008 at 2:08AM
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I'm nearly 80 years of age (and happy and thankful to be enjoying good health).

I've bought stocks three times in recent months, and plan to go on doing so during coming months ... including borrowing to do so if I consider it wise.

I don't know when the market bottom will occur, but it'll be sooner or later.

The longer it's delayed, the greater likelihood that when the turn does take place, there'll be a more pronounced (and quite likely longer term) runup following the turnaround.

If I'm not around to enjoy it, my beneficiaries are not in immediate need of money (and should they be, would likely use the stocks that were undervalued as collateral for a loan).

My executor is smart enough to manage the assets skilfully, and there's enough available to satisfy the income tax people (I think).

The charities that are to benefit may get some over the short term, but if the markets are low, my executor will have leeway to allow them to recover before making the major contribution ...

... even if she needs to use the assets as collateral to make a short- to medium-term loan to pay the charities earlier, in order to get the necessary receipts to enable there to be a substantial reduction in tax payable on the estate in the year of my death.

My investing career, as far as stocks go, began about 45 years ago, so I've seen a few years of market fluctuations (and, dare I say, "shenanigans"?).

I took the course that stockbrokers take over 25 years ago - and recommend it, for anyone who has enough interest in the field and the mental alacrity to make it worthwhile.

I took the six courses that the Chartered Fiancial Planners take, as well.

Many investors would learn a great deal about evaluating the market, and how to evaluate individual stocks, by taking those courses, as well.

The whole deal would likely cost around $2,000. - and after 10 years or so (should you not die in the meantime), I suggest that you would think it to be one of the smartest investments that you'd have made in recent years.

Have a lovely late-winter week, everyone. Don't let the weather freeze your investment smarts!

ole joyful

    Bookmark   March 4, 2008 at 5:38AM
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