Saving for a house downpayment - critique my plan please

Hi, I hope to have enough saved for a downpayment in 5-7 years (I live in a high cost of living area). I already fully fund my Roth IRA, I contribute 17% of my income to my 401k, and I have an e-fund in an ING account. Now I want to save for the house.

After doing some research (but apparently not enough), I decided to open up a managed-allocation mutual fund with TIAA-CREF. This way I could open an account with only $1500 and contribute $150 monthly. They deposited my initial check today. I will continue to put $350/month (min.) in my ING account towards the house fund.

First, do you think this is ok? Or was I unwise to open the mutual fund and should I have continued to put all my savings into my ING account? I thought that if my time-frame is 5-7 years that I could withstand some risk.

Second, I didn't know that T.Rowe Price allowed for a smaller opening contribution until I read your boards! This is a very big bad on my part - and after comparing their managed-allocation fund to TIAA-CREF's I see that I made a mistake. And I see that some of you do not recommend using TIAA-CREF at all. Should I wait a few months before closing the TIAA-CREF account and move my money to T.Rowe? Do you think I can do it immediately? Would you recommend that I keep my money with TIAA-CREF?

Sorry this is long... but any input you can offer is greatly appreciated!

[34saving]

Re: Saving for a house downpayment - critique my plan please

Welcome! Your plan looks good to me. You're right that in a 5-7 year timeframe, stocks will generally outperform a savings account. Moreover, this isn't money you NEED, so if things really go south you can keep renting. I'd stick with TIAA-CREF for the time being simply because you'll probably be hit with an early redemption fee if you switch right now. (Check your prospectus.) Whether you want to keep giving more money to TIAA-CREF is up to you. Dh has his 403b through tiaa-cref (The only thing his employer works with) and does okay, but you're right that there's probably better stuff out there. I'm sure other people here will have more to add.

[ericmedem]

Re: Saving for a house downpayment - critique my plan please

Depending on your market you may not be saving at all. If you are saving for a house that is $150,000 and equity growth in your area is at 5% (a fairly common figure), then in 7 years the home that you could buy today for $150,000 will cost over $200,000. Your money in the account will have grown to $42,122 (7 years at 8% w/$1500dn and $350/mo) but this amount will be taxed when removed so reduce it to roughly $37,000. So essentially while your saving you are losing $15,000. ($52,000 Home equity-$37,000 Savings). If you are saving this money in order to keep your payment down then you must also take a look at current rates vs historical rates. Currently you can get rates close to 6% and normal rates over the last 15 years have been closer to 7-7.5%. On $120,000 in mortgage debt (150,000-30,000 20% down) a 1% rate gain would be 798.37 vs a 6% rate now $719.46 so roughly a $78 difference in payment if rates climb only 1% (they will probably be higher)
$78 a month gives you $13,000 difference in buying power.

This is just another way of looking at saving, in many cases you are better off buying now and locking in your price then trying to keep up with equity gain. The more expensive homes become even tougher to keep up with.

Eric Medemar

[meaghanchan]

Re: Saving for a house downpayment - critique my plan please

I think your plan is a good one; the only other thing I would add is that as you get closer to your goal you probably want a plan in place to reduce equity (stock) exposure. For example, once you get to the point that you think you'll be able to buy a house within the next 2 years, you could move half of the money in your mutual funds to cash. Every 6 months from that point, you could take out 1/4 of the remainder of the money in mutual funds and move it to cash. That way, when you're ready to buy a home, you have the money available regardless of what the stock market does.

[autoxer]

Re: Saving for a house downpayment - critique my plan please

... equity growth in your area is at 5% (a fairly common figure)

... you must also take a look at current rates vs historical rates. Currently you can get rates close to 6% and normal rates over the last 15 years have been closer to 7-7.5%.

But when rates go up, prices go down. And when prices go up, rates go down. Besides that wages also tend to increase, helping your buying power. I wouldn't worry about getting priced out of the market. But if I did, then I would end up with a big downpayment to find a more suitable market.

Second, I didn't know that T.Rowe Price allowed for a smaller opening contribution until I read your boards! This is a very big bad on my part - and after comparing their managed-allocation fund to TIAA-CREF's I see that I made a mistake. And I see that some of you do not recommend using TIAA-CREF at all. Should I wait a few months before closing the TIAA-CREF account and move my money to T.Rowe? Do you think I can do it immediately? Would you recommend that I keep my money with TIAA-CREF?

Besides the opening contribution, what don't you like about TIAA-CREF?

I think you have a good plan & I agree with meaghanchan that you should gradually move the funds to cash to lessen the markets effects as you get closer to the purchase.

Re: Saving for a house downpayment - critique my plan please

Thanks, everyone!

I can't buy now (though I'd love to) for a number of reasons. I don't have the 20% downpayment required for the reasonably priced co-ops for sale in my area and I can't afford a $700k mortage on a condo that would allow a smaller downpayment. I could move to the suburbs, but then I would have to buy a car and spend an additional $300/month on commuting costs. Even in the suburbs, my mortgage payment would be double what I'm paying now for rent.

I thought my only option was TIAA-CREF. I think the managed allocation fund at T-Rowe Price is less expensive in the long run. I compared the expenses of the funds (RPBAX and TIMRX) on Morningstar and the total cost projections were lower for the T-Rowe Price fund. Also, it's more established - TIAA-CREF's fund is less than 2 years old. (Not sure that will ultimately matter.) I still did a lot of research before and was comfortable with my decision and with the funds that are part of the TIMRX. I'm sure it is fine either way.

And I will definitely move my funds over to cash the closer I get to my goal date - that was a great suggestion, thanks!

I only plan on putting $150/month into this fund - and $350/month into my ING account. Do you think I should take another $100/month and throw it into the TIAA-CREF account, keep it in ING, or even open the T-Rowe Price fund?

[ericmedem]

Re: Saving for a house downpayment - critique my plan please

[QUOTE=autoxer]But when rates go up, prices go down. And when prices go up, rates go down. Besides that wages also tend to increase, helping your buying power. I wouldn't worry about getting priced out of the market. But if I did, then I would end up with a big downpayment to find a more suitable market.

QUOTE]

I don't know what planet your from but rates play a very small role in housing prices. That small part has more to do with investment property. Rates have held fairly steady with 1 or 2 % for the past 15 years and housing prices have definatly not held steady for the past 15 years.

I dont know what a co-op is, but arent there mortgage programs available for co-ops that allow 95% or even 100% financing.

Yes wages do increase along with housing prices, but I guess I would prefer to lock my housing price now, and keep my wage increases coming rather than having the two cancel eachother out.

Eric Medemar

Re: Saving for a house downpayment - critique my plan please

With a co-op, the problem isn't getting money from the bank. A co-op is a building owned by its tenants. If you don't have 20% to put down, the co-op board won't even consider your application.

[autoxer]

Re: Saving for a house downpayment - critique my plan please

I don't know what planet your from but rates play a very small role in housing prices. That small part has more to do with investment property. Rates have held fairly steady with 1 or 2 % for the past 15 years and housing prices have definatly not held steady for the past 15 years.

I know it's not a direct inverse relationship, but the low & fairly steady interest rates contributed to the housing prices rocketing. If people couldn't get 6% mortgages, then they wouldn't be able to spend so much & the market would be considerable lower. I think housing prices will level off & incomes will catch up to some sort of equilibrium.

[Scanner]

Re: Saving for a house downpayment - critique my plan please

I am going to go against the majority and say you are too high risk.

Hear me out.

First of all, is TIAA-CREF a no-load fund? I hope it was - then you don't have to pay any exit or entrance fees into the fund.

So, for the downpayment of your house, you sound like you are sitting in about 33% cash and 66% stocks? (is that right?)

Yes, 5 to 7 years out is a long time but I am not sure I would be too much in stocks. Yes, over the long haul, stocks outperform bonds and cash vehicles. But sometimes, there have been corrections were you didn't make up the losses for more than 5 to 7 years, not to mention, there could be a steady bear market (maybe more liikely with the current circumstances) where you see your house downpayment slowly and slowly decline as you are adding and you are just waiting around for that bull rally to hit on the 7th year.

Then you are sweating bullets because you are close to your goal. (you see what I am saying?)

I am not normally a CD fan but in your case, for your goal, they might make sense.

You can ladder your CD's so you can maximize your interest.

For instance, if you have 10K sittting in an ING account, take out a 3 year CD, then wait 3 months, take out another 3 year CD, and so on.

That way, maturity of your money, the partial kit n' kaboodle, is never more than 3 months away. Or maybe better - just take out a 5 year CD and then take out shorter terms as you get closer.

I am sure you can get around 5-6% interest on CD's now if you have a decent term. I know it doesn't sound like a lot, given the recent bull rally of stocks but actually, that's not a bad rate of return.

Finally, you sound like a great saver - I would consider this - it's a buyers market now for houses. I know you are being responsible and waiting for the 20% downpayment but why not consider a 10% downpayment, get in now, while the getting is good, and then just pay down the mortgage early? Remove the silly mortgage insurance after you reach 20% equity.

Mortage debt is good debt.

I wouldn't normally recommend this but you sound like a good saver anyway and someone who would follow through. I would hate for you to wait 5 years and then the average house price in the US is $450,000 instead of the current $250,000.

Maybe it won't happen, but maybe it will. Now's a good time to buy - I'd offer 70-80% of asking price on average.

Good luck whatever you decide.

[meaghanchan]

Re: Saving for a house downpayment - critique my plan please

I only plan on putting $150/month into this fund - and $350/month into my ING account. Do you think I should take another $100/month and throw it into the TIAA-CREF account, keep it in ING, or even open the T-Rowe Price fund?

I think it's important to have an asset allocation plan that you follow. I'll use my own plan as an example-- my situation's fairly similar to yours (high COL area, plan to buy in fairly far future [10-12 years, in my case], will want to have 20% downpayment so co-ops are an option, don't want to move to suburbs b/c of commuting costs).

My asset allocation plan calls for (currently) 50% stocks/50% bonds/cash. For my stock portion I will choose a low-expense, tax-efficient mutual fund (Vanguard's Total Stock Market Index, VTSMX, is excellent for that), though I currently don't have the funds to meet the minimum investment. I know I could go with a higher-cost mutual fund with a lower minimum, but for me and my long time horizon, I believe this is the way to go.

Anyway, start out at 50%/50%. Every year, I will reduce my allocation to stocks by 5% and increase my allocation to bonds/cash by 5%. So by year 10 (when I'm planning to start house-hunting) I'll be 100% in short term bonds/cash.

So if I were to be saving $500/month for this purpose all together (your numbers- $350 + $150) I would be putting $250 in the stock mutual fund and $250 in ING. Each month (or each quarter, or each year) you can rebalance, and see where you are- if stocks have had a great month, your next month contribution might all go into ING to maintain your allocation. If stocks have fallen a lot, your next month's contribution might all go to your mutual fund to maintain your allocation.

About 90% of your results will be accounted for by your asset allocation, not the specific funds you choose- so don't worry too too much about what fund you've chosen. You don't want to be jumping in and out of funds too much in a taxable account, so do a little more research, and if you really think it's the right decision, switch- but don't switch to T. Rowe Price and three months later switch to Fidelity and three months later switch to Vanguard.

[Squantum]

Re: Saving for a house downpayment - critique my plan please

I am going to go against the majority and say you are too high risk.



First of all, is TIAA-CREF a no-load fund? I hope it was - then you don't have to pay any exit or entrance fees into the fund.

TIAA-CREF is known for its low fees. It doesn't have any load funds. I like it!

[Scanner]

Re: Saving for a house downpayment - critique my plan please

I actually thought of another way to skin the cat so to speak.

Click on this link:

https://flagship.vanguard.com/VGApp/hnw/FundsPerformance?FundId=0027&FundIntExt=INT&DisplayBarChart=false

It's Vanguards Wellesley Fund - it's been around forever. I recall the best man in my wedding (and I in his) using this fund for the same goal - a downpayment on a house.

In a nutshell, it's 60% bonds, high quality, and 40% stocks (I think blue chip, but don't quote me). I remember reading an article awhile back about that "magic mix" of 60/40 being the way to maximize return while minimizing risk.

You can see the performance is fairly steady. I remember an analyst breaking down year by year and there was only one year where there was a loss and it was only like -8% or something. Most years return 6-15%.

So maybe keeping here and when you get about 18 months away from buying the house, move it into a money market fund.

This is probably a better suggestion than my original - because you would have CD's maturing here and there and you need that money liquid should you see the house that's perfect.

[TBH]

Re: Saving for a house downpayment - critique my plan please

calicat,

I have workplace retirement accounts at TIAA-CREF and I have had mixed experiences with them. On one hand, they have relatively low costs and good fund options. Plus, they're a non-profit, which I like. On the other hand, their customer service is a little inconsistent. But I don't think there's anything WRONG with them. I wouldn't advise you to "run far and fast" or anything. If it were me and I'd just made an investment choice that was a good decision but maybe not a great decision, I'd hang on for a year and in that time try to educate myself. Then I'd move my money if I still felt like there were better optoins out there.

Overall I think your plan is fantastic. I think you're smart to put some of the $$ in stocks, but keep more of it in cash. Good for you for getting all your other savings ducks in a row before working on saving for a house. It's tempting to reduce retirement savings or plunder the E-fund for a downpayment, but in the long run you'll probably be glad you did it this way.

About the question of whether to buy now or wait til you're ready, I would wait. It sounds like you'd have to compromise too much (move to the burbs, buy a car, who needs that?) During the recent real estate boom, everybody was urging each other to buy because the interest rates were low. I think there will always be reasons to hurry up and buy, but as long as you're buying a place you intend to stay in for a long time, you don't have to be too concerned with whether the market is up a little or down a little. Plus, once you have your downpayment, you can shop for a house for as long as you want. If you have the money in place and discover, whoops, now it's a seller's market and I can't get what I want easily, then you just wait it out and save a little more in the meantime and you'll eventually be able to buy what you want.

Owning a home has so many hidden costs that doing it before you're in a good financial position doesn't seem worth it to me. You could probably pull it off, but it would be stressful.

[Fern]

Re: Saving for a house downpayment - critique my plan please

Welcome! Your plan looks good to me. You're right that in a 5-7 year timeframe, stocks will generally outperform a savings account. Moreover, this isn't money you NEED, so if things really go south you can keep renting. I'd stick with TIAA-CREF for the time being simply because you'll probably be hit with an early redemption fee if you switch right now. (Check your prospectus.) Whether you want to keep giving more money to TIAA-CREF is up to you. Dh has his 403b through tiaa-cref (The only thing his employer works with) and does okay, but you're right that there's probably better stuff out there. I'm sure other people here will have more to add.

I guess i have to disagree with the statement that stocks will outperform during a 5 to 7 year time period. I don't think you should count on that. We've had some great returns as of late, but we can't depend on that, and again, 5 to 7 years is, as far as investments go, relatively short term.