Best way to save for a mortgage down payment?

First let me say I am a simple money guy, and I am not a big fan of leveraging, so my advice is different.  From your original post I take it there are still some debts that need to get paid, then I would take all of the extra and build a 3 to 6 months emergency fund for all of your expenses. I like to use an online savings account for this as I can get to money in a couple of days but it is not so easy to access that it gets spent on other things. Then I would put the extra on your current mortgage as equity in your current home, this will effectively pay interest on your savings at whatever your mortgage rate is. 

When it comes time to buy a new place you can then work on a contingency offer plan or access the equity with a HELOC. These are typically low cost, much less than a bridge loan. If you have an emergency cash reserve, and explain to the lender you are not keeping both homes then getting a new mortgage while still owning the current house is not a big issue.

dean1484 said:

My only thaught is to look at you current house and evaluate what needs to be done to either increase the value by investing in what you already own or at least make it more sale able so it sells fast and you may not make money but you will recoup what you invest and get a fast sale. 

A deep cleaning would be about it, maybe a few spots to touch up paint around the back door from the dogs.

We are the first people to live here since it was remodeled. It was a total loss to smoke damage. So everything from the roof, to all the utilities and appliances, granite, paint, etc etc....it's all less than 3-years old. 

The current plan is to get the landscaping to look as nice as the inside of the house, maintain everything nicely for a few years, than put it on the market.

I actually wouldn't even mind selling it sooner and renting while we looked at houses or built new, so we wouldn't have to deal with the contingency stuff. But I suspect finding a landlord that will allow 3 dogs and a cat is basically impossible. I know I wouldn't rent to that regardless.if your income or credit score.

For saving the additional down payment, I'd look at an online savings account over on bankrate and just pick the FDIC insured one with the best rate. It's not going to be a great rate but it's the safest approach as long as you don't exceed the FDIC insurance limit.

You could look at bond funds and stick the money into a low risk one, which is hopefully going to get you a little more return, but at an increased risk. Anything else that pays you more of a return is going to have considerably higher risk.

In reply to BoxheadTim :

I was afraid that was going to be the real answer. 

Since some others have mentioned the cash-out or HELOC....................would it make sense to just hammer that money into the current mortgage? Improves the equity on the house and if we ended up staying longer we saved some interest from extra/early payments? 

I also saw it mentioned to borrow against the 401k for the down payment? I knew that was an option, but the thought of it makes me a bit nervous. Is that justified or not?

z31maniac said:

In reply to BoxheadTim :

Since some others have mentioned the cash-out or HELOC....................would it make sense to just hammer that money into the current mortgage? Improves the equity on the house and if we ended up staying longer we saved some interest from extra/early payments? 

I normally *never* suggest paying more on a mortgage than you have to. 

But if your other option is a savings account? Yeah, it makes sense to put extra in the mortgage.  If your rate is say 3.5%, and you itemize, it brings it down to around 3%, its still better than almost any savings account you'll find.  If your rate is higher or you don't itemize it just pushes that further in favor of paying down mortgage first.

ProDarwin said:

z31maniac said:

In reply to BoxheadTim :

Since some others have mentioned the cash-out or HELOC....................would it make sense to just hammer that money into the current mortgage? Improves the equity on the house and if we ended up staying longer we saved some interest from extra/early payments? 

I normally *never* suggest paying more on a mortgage than you have to. 

But if your other option is a savings account? Yeah, it makes sense to put extra in the mortgage.  If your rate is say 3.5%, and you itemize, it brings it down to around 3%, its still better than almost any savings account you'll find.  If your rate is higher or you don't itemize it just pushes that further in favor of paying down mortgage first.

The rate is a bit higher than that, due to the aforementioned 0% down. I used what cash I had for closing costs and buying the myriad of new things I needed now that I had a home and yard to take care of. 

But the mortgage itself is still small enough (balance is under $150k now), and I don't have any other real deductions, itemizing wouldn't make sense for me.

Yeah, so that makes even more sense to put extra $$ toward the mortgage than savings account, because your effective rate is whatever your actual mortgage rate is, which I am sure is significantly higher than a savings account.

ProDarwin said:

Yeah, so that makes even more sense to put extra $$ toward the mortgage than savings account, because your effective rate is whatever your actual mortgage rate is, which I am sure is significantly higher than a savings account.

I'm going to assume since you didn't address it, my hesitance regarding plowing it in to the 401k then borrowing against for a down payment is warranted?

I'm no expert on that, but I would be hesitant as well.

You remove $ from your retirement account, and even though you pay it back with interest, there is a big opportunity cost there.  It sounds like you certainly have the means to accomplish things via a different route, so I would focus on that and leave any 401k borrowing as a last resort.

mtn said:

z31maniac said:

The ESPP idea is intriguing, I need to see what the fee structure is for selling them. We get a 5% discount, so that's free money. I've seen it mentioned elsewhere about people pulling from the 401k to make a downpayment, but that doesn't sound like a good idea.

That will depend on your ESPP. At my prior company, the ESPP was actually just the company match on our 401k. So not really an ESPP, and not really helpful for this situation.

At my current company, you can direct up to 15% of your paycheck into company stock. After holding for a year, they'll match 25% your contribution - so if you contribute $100 in January 2020, in January 2021 they'll contribute $25. This is all in taxable accounts, it literally is all managed through my Fidelity account.

Oh I forgot to address this. 

We have a 401k match, it's very small, but there is one. We also have an ESPP basically we pick the amount of money we want to contribute for X period of time (I think they do it in 6 month chunks). At the end of the period, however much money you have in the account is used to purchase stock at the closing price at the end of the period, minus 5%.  We can then sell, keep, etc, whatever we want with those stocks.

ProDarwin said:

I'm no expert on that, but I would be hesitant as well.

You remove $ from your retirement account, and even though you pay it back with interest, there is a big opportunity cost there.  It sounds like you certainly have the means to accomplish things via a different route, so I would focus on that and leave any 401k borrowing as a last resort.

That was my thought as well, it's just always good to go through all the options.

I wouldn't borrow against a 401k for a down-payment. A home equity loan on your current house makes a lot more sense, and it would be paid off as part of closing on selling your old house.

I'm all in on putting savings in the stock market, but 3-5 years is a time range I would call "on the cusp." Meaning, at 5 years it would make sense to put it in the stock market. But at 3 years you're more at risk for it having gone down instead of up. So if the time frame is really 3-5 years and not more like 5-7, I would put it in a high yield savings account or CD or money market account. I think you can get around 2% in a high yield savings nowadays, if you shop around. I would not pay extra on the mortgage since you'd then have the same problem you have now: lots of equity and not much cash. Unless you would consider paying the extra into your mortgage and then getting a home equity loan once you need the down-payment - check with your bank on that, maybe it would net the best return.

What kind of budget are you looking at for the new house? Home equity loans are often limited to a percentage of the home's value in total debt, meaning first mortgage and second mortgage together cannot exceed 80% of the value of the home.

Do you have more than 20% equity now? If so, you could go ahead and refinance to eliminate the PMI and lower your rate and then have more to sock away or apply to principal. Plus you could get away from the satchel of Richard eaters. Refinancing is a pretty simple process, typically. Your rates will flex depending on how much equity and how much in fees you pay, from $3000 on the high end to nothing at all for a higher rate - higher rate being relative, in today's market it's still pretty low. If you're paying PMI now, and you have 20% equity, or enough cash to give you that much equity, you absolutely should refinance now. 3-5 years of PMI eliminated is quite a lot of savings.

If you go the CD route, you'll be at most matching inflation rates or coming close, which isn't a horrible thing. I have two Navy Fed traditional IRAs w/ them right now and they're nothing more than pumped up CDs; somewhere around 3.4% IIRC.

I've found bankrate to usually have a decent list of the current rates in the country: https://www.bankrate.com/banking/cds/cd-rates/

You can also try calling your current bank/local banks and asking them what their highest rate is. They have no qualms about it as majority of them are/should be used to "CD hunters" and will happily take your money for an x amount of time.

dculberson said:

Unless you would consider paying the extra into your mortgage and then getting a home equity loan once you need the down-payment - check with your bank on that, maybe it would net the best return.

What kind of budget are you looking at for the new house? Home equity loans are often limited to a percentage of the home's value in total debt, meaning first mortgage and second mortgage together cannot exceed 80% of the value of the home.

Do you have more than 20% equity now?

1. That is starting to seem like a good option. I'll talk with my mortgage guy and see what he thinks. I already talked with him in December about a refinance, so still weighing it. For my timeline, it seems like the closing costs would be better used to just put toward the principal?

2. Nothing set in stone yet, my girlfriend graduates in May with her Bachelor's, so hopefully that will help her get a more well compensated position. But right now, I'm thinking somewhere between $275-350k. Obviously would go less if we find what we want for less, but it's unlikely. 

3. Lot's of assumptions for me on this one, based on similar homes in the neighborhood and what they've sold for, I suspect we are around 15% equity? A generous appraisal would put us right on the edge. 

I agree that the safest ROI for your money is putting into mortgage principle. 

The real question you need to talk to your 'mortgage guy' about is what the typical monthly DTI (Debt-to-Income) limits are on purchasing a new primary residence. Typical DTI assumptions can be found online, but a mortgage specialist may be able to give you a more specific number. If you can't get approved for the new mortgage on top of your current one, then generally speaking you're most likely going to get stuck having to put in an contingent offer and double-close...Making the down payment concerns a moot point anyway, assuming significant positive equity in your current home.

What I would do first is figure out your current DTI, both front-end and back-end, as a basline for where you're at now. Then recalculate it adding in the largest value new mortgage you're considering in addition to the HELOC you would probably want to use for the down payment. If this DTI is above the typical lending limits, you'll have to get more creative. Since the interest rates are rather good right now, one option would be to run the numbers again as if you were to refinance now. If still too high, run the numbers for refinancing further out, roughly 6mo-1yr before you plan to start house hunting. Make sure to also account for the additional principle paydown in the amortization, and to be on the conservative side assume higher future interest rates on the refi. If this still doesn't get you into the ballpark and you really want to avoid double-closing, then you'll need to start looking at more complex and/or creative options.

z31maniac said:

1. That is starting to seem like a good option. I'll talk with my mortgage guy and see what he thinks. I already talked with him in December about a refinance, so still weighing it. For my timeline, it seems like the closing costs would be better used to just put toward the principal?

If you can't eliminate PMI with a refinance, it may not make sense. But there are "free" refinances out there, I spoke with my prior bank about one and while the rate was higher it was still lower than what I was paying so I would have started saving money from month 1. But we ended up moving and selling that house instead.

How to save?  It's like I keep telling my wife:  Stop spending so dang much money!

It really is that simple.  You can only save what you don't spend.

1988RedT2 said:

It really is that simple.  You can only save what you don't spend.

This is one of the best posts that has ever been made.

z31maniac said:

dculberson said:

Unless you would consider paying the extra into your mortgage and then getting a home equity loan once you need the down-payment - check with your bank on that, maybe it would net the best return.

What kind of budget are you looking at for the new house? Home equity loans are often limited to a percentage of the home's value in total debt, meaning first mortgage and second mortgage together cannot exceed 80% of the value of the home.

Do you have more than 20% equity now?

1. That is starting to seem like a good option. I'll talk with my mortgage guy and see what he thinks. I already talked with him in December about a refinance, so still weighing it. For my timeline, it seems like the closing costs would be better used to just put toward the principal?

2. Nothing set in stone yet, my girlfriend graduates in May with her Bachelor's, so hopefully that will help her get a more well compensated position. But right now, I'm thinking somewhere between $275-350k. Obviously would go less if we find what we want for less, but it's unlikely. 

3. Lot's of assumptions for me on this one, based on similar homes in the neighborhood and what they've sold for, I suspect we are around 15% equity? A generous appraisal would put us right on the edge. 

If you only have 15% equity then paying down the mortgage makes even more sense. You added pricipal not only makes you your interest rate as a return but puts you closer to getting rid of the PMI insurance. Depending on your loan, sometimes you can get the pmi droppedd on the current loan with an apprasial thet gets you to a 20% equity position. Other loans reqire a refinance to get rid of the PMI. 

I could be wrong, but I think that current FHA loans require a refinance to get rid of the PMI.

dculberson said:

I could be wrong, but I think that current FHA loans require a refinance to get rid of the PMI.

Yeah, I'm seeing conflicting information regarding this. I was told at the beginning, what you understand. I'd have to refinance once 20% equity is acheived. But I've also read stuff that says they are legally required to do so once you reach 78% LTV. 

Another thing to check on.

On our loan, I just called the bank once we were under 80% LTV, and they dropped the PMI off. Seems like they grumbled a little, but it did not require any paperwork. Not an FHA loan, so I don't know if that's different.

z31maniac said:

dculberson said:

I could be wrong, but I think that current FHA loans require a refinance to get rid of the PMI.

Yeah, I'm seeing conflicting information regarding this. I was told at the beginning, what you understand. I'd have to refinance once 20% equity is acheived. But I've also read stuff that says they are legally required to do so once you reach 78% LTV. 

Another thing to check on.

The only complaint I had with my mortgage originator, but the reason I will not go with them again, is that I asked repeatedly, directly, for them to confirm that PMI would drop off when we hit 20% equity. Yes, they told me I would not pay any PMI after 20% equity. What they failed to mention was that I wasn't paying ANY PMI. On an FHA loan, you pay MIP. Basically the only way to get rid of it is by refinancing. 

https://www.moneytips.com/mip-vs-pmi

mtn said:

z31maniac said:

dculberson said:

I could be wrong, but I think that current FHA loans require a refinance to get rid of the PMI.

Yeah, I'm seeing conflicting information regarding this. I was told at the beginning, what you understand. I'd have to refinance once 20% equity is acheived. But I've also read stuff that says they are legally required to do so once you reach 78% LTV. 

Another thing to check on.

 

The only complaint I had with my mortgage originator, but the reason I will not go with them again, is that I asked repeatedly, directly, for them to confirm that PMI would drop off when we hit 20% equity. Yes, they told me I would not pay any PMI after 20% equity. What they failed to mention was that I wasn't paying ANY PMI. On an FHA loan, you pay MIP. Basically the only way to get rid of it is by refinancing. 

 

https://www.moneytips.com/mip-vs-pmi

I suspect that is what I have as well, would have to check, but I remember them telling me the "PMI" would be there forever. Scheisters. 

 

z31maniac said:

mtn said:

z31maniac said:

dculberson said:

I could be wrong, but I think that current FHA loans require a refinance to get rid of the PMI.

Yeah, I'm seeing conflicting information regarding this. I was told at the beginning, what you understand. I'd have to refinance once 20% equity is acheived. But I've also read stuff that says they are legally required to do so once you reach 78% LTV. 

Another thing to check on.

 

The only complaint I had with my mortgage originator, but the reason I will not go with them again, is that I asked repeatedly, directly, for them to confirm that PMI would drop off when we hit 20% equity. Yes, they told me I would not pay any PMI after 20% equity. What they failed to mention was that I wasn't paying ANY PMI. On an FHA loan, you pay MIP. Basically the only way to get rid of it is by refinancing. 

 

https://www.moneytips.com/mip-vs-pmi

I suspect that is what I have as well, would have to check, but I remember them telling me the "PMI" would be there forever. Scheisters. 

 

Shame on me, I guess, for not doing better research.  I had nothing in writing though, otherwise I would  have reported them to the CFPB for a UDAAP violation. Unfortunately, nothing to back it up. And while I say I'd never use them again, that is not true - if they're the lowest rate I would.