Where to keep savings for home loan deposit?

Question

I'm a US resident and I've saved > $100k cash for a home deposit. I expect to finance a home in the next 12 months. Currently the cash is split between Bank savings account and a couple of money market accounts (like FMOXX).

Are there higher yield, short term alternatives for this type of saving? Note I'm not after specific product recommendations, but general investment strategies for this type of situation.

Answer 1

Start with you bank/credit union and see if they have any FDIC/NCUA insured products that have a higher interest rate. If their offerings don't get you any additional interest then you may have to widen your search. Online only banks should have better rates. There can also be options that are very safe through Treasury direct, but during the crisis those rates are very low.

The issue for your situation is that you want extremely minimal risk, so that when you need it is still there. Your options are limited, though the sources of those options are quite broad.

A CD or other account that locks in a rate would let you know how much you will get in interest, but that has the additional risk if the time frame isn't known.

Answer 2

For your goal of house down payment , you need the investment which offers below things:

• Liquidity to withdraw when you need the money
• Safety of the investment, Not to lose the investment
• Decent rate of return, increase in the investment to help in the house down payment

You can think of below options:

• Certificate of deposits with shorter durations like 1 month, 3 months like that and less penalty in case of early withdrawal
• Liquid Certificate of deposit, which allow you to withdraw without incurring penalty charges
• High yield savings accounts , preferably from credit unions or online only banks. Think of the credibility of the bank before investing. Return of the investment is more important than the return on the investment.
• Diversify your investment in multiple banks to avoid any delay being caused in a bank in processing of your encashment and it also adds safety of your corpus

Note: Don't even go for stock market based investments like stocks, bonds etc, which are only suitable for long term investment goals

Answer 3

The simple answer is that in our historical era, the answer is unfortunately simply "No".

For better or worse in our historical era, interest rates are basically zero. Unfortunately there are no exceptions out there.

Answer 4

You want the reward. Can you stand the risk?

You might consider an ultra-short-term bond mutual fund. Using Vanguard's Ultra Short Term Bond Fund Admiral Shares [VUSFX][1] as an example, it has shown greater than 2% total returns per year in 1, 3 and 5 year histories.

What about risk? If someone bought and sold VUSFX at the worst possible times in the disaster that was 2020, buying at the high in early March and selling at the low of early April, they would have lost about 1.8%. Can you afford to lose $1800 of your $100K if you have similar bad timing?

Yet even with that risk of loss for a forced sell-off after a very short term ownership, VUSFX had a total return of 2.02% for the full year 2020. If you will be holding the funds for at least a few months, your risk of loss is minimal, though not zero risk.

Vanguard warns investors that VUSFX is not to be used as a substitute for an insured money market account. So go in with your eyes open and understand the risks. Then reap the rewards if the risk is tolerable.

VUSFX pays dividends monthly which are taxable as ordinary dividends just like interest. [1]: https://investor.vanguard.com/mutual-funds/profile/VUSFX

Answer 5

A brokerage account should generate higher income than your bank. The issue is to find a reliable agency, and even tho the risks would be higher. Just decide what risks you can afford. Concerning home deposit, I’d prefer safe options.