Investing in your down payment money
Investing in your down payment money
Investing in your down payment money
If you're like most people who are working towards buying a home, you are probably going to need access to your down payment money within the next few years. Getting enough money together to make a down payment can be a long and difficult task requiring discipline and patience. Most lenders prefer that you pay about 20% of the purchase price as a down payment in order to protect themselves in case of foreclosure.
It's clear enough that a significant down payment is going to be necessary if you want to qualify for the best loan possible. Chances are you don't have this kind of money just lying around and will need to spend some time (probably several years) saving for this expense. What exactly should you do with this money in the meantime? Should you invest in the stock market? What about bonds or mutual funds?
If you are planning to purchase your home within the next few years, then we recommend that you avoid riskier investment accounts such as those involving the stock market
It may not seem too exciting (and the interest rates may not be very impressive especially now that the Federal Reserve is keeping interest rates low) but you need to find a safe place to accumulate your down payment money. A good option is a money market mutual fund because this type of account does not put your original investment at risk.
These types of funds tend to invest in very safe investments including certificates of deposit, treasury notes, and commercial paper by highly reputable companies. You may be confused when we say that money market funds are safer because many people think that mutual funds are always investing in the stock market. However, a money market fund is required to stay with low risk investments by the Securities and Exchange Commission.
This has to be a better option than simply opening a savings account at your local bank. Your bank will probably not be able to offer the same interest rate because of the overhead costs of maintaining various branches and advertising.
You should also note that many money market accounts give you check writing privileges so you can withdraw money more easily than you would in a stockmarket account. You may want to consider an automated investment plan such as a direct deposit from your checking account in order to force you to save your down payment money.
Another important consideration when choosing a money market fund is the cost of operating expenses. The best companies typically have an annual operating expense rate below 1%. This means that you don't have to worry about your current interest being eaten up by high operating costs.
It's true that these kinds of investments do not offer a great return on investment. At the time of this writing, as a matter of fact, interest rates are very low in both money market funds and savings accounts at your local bank. However, if you need access to this money for a down payment, you'll come to appreciate the little risk involved and will take whatever small amount of interest you may receive along the way.
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