The best way to save for a down payment – – February 25, 2016

The best way to save for a down payment
by: Kathryn Vasel

What’s the best way to keep savings for a house down payment? Cash loses value from inflation, bonds will drop if interest rates go up, and stocks are risky. –Susan, 31, St. Louis

Coming up with thousands of dollars for a down payment is tough, especially if you’re already struggling with obligations like student loans, car payments, rent, and well … life.

While there are loans that require very little down, most banks are looking for down payments closer to 20%With the median home price over $200,000, that could mean coming up with $40,000 or more.


What to do with all that cash?

Your time horizon and risk tolerance play a big role on where to keep your down payment savings.

Calculate: What will your mortgage payment be?

Whether becoming a homeowner is a decade out or you’re already house hunting, here’s where financial planners suggested keeping the funds:

10 years out:

If it’s going to be another decade until you plan to buy a home, there’s an opportunity to invest the savings and try to grow the money a little before you actually need it.

“This is a great time to get into the market because it’s low,” said Ellen Jordan, a certified financial planner and senior vice president at Bryn Mawr Trust.

But stocks come with risk.

“You’ve worked hard to save this money. The last thing you want to see is a drop in value that could prevent you from being able to purchase a home,” said Taylor Schulte, certified financial planner and CEO of Define Financial in San Diego.

One way to help minimize the potential risk is to diversify the stocks you invest in. For instance, acouple of index funds or ETFs, which track major stock indexes, could do the trick.

Throwing some bonds into the mix could help temper the risk even more, since bonds are less volatile than stocks.

Jordan suggested a diversified portfolio might look something like this: 50%-60% in stocks and 50%-40% in bonds.

Be sure to pay attention to the maturity dates on the bonds, with none going longer than seven to 10 years, she added.

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