At present, home mortgages are available with very little down payment required. A Federal Housing Administration (FHA) loan will take as little as 3.5% down. But you can get a much better mortgage interest rate with a larger down payment.

What should you do with the down payment money you’re saving?

Odds are, your dream of homeownership is less than 3-5 years in the future. Like other short-term financial goals, you should be conservative with this savings. No investing in the stock market and avoid most bonds and bond funds.

• Simply stashing it in an FDIC-insured interest-bearing checking account may be fine

Yes, the interest rate is rather anemic, but this is only for a few years. There are other options: some are guaranteed, and some involve a bit of risk.

Certificates of Deposit (CDs)

CD’s offer a guaranteed return for a specified timeframe. The downside is that your money is locked in for that timeframe. Timeframes can range from 3 months all the way up to 10 years. The longer the timeframe, the better the interest rate. Almost all banks and credit unions offer CDs.

Because you probably have a good idea of when you’ll be ready to go house-hunting, the timeframe restriction most likely won’t be an issue.

As you save money over time you can even create a “ladder” of multiple CD’s scheduled to end right at the time you think you’ll need them.

For example, this year you might start a five-year CD. And next year, with more savings in hand, you can start a four-year CD. The year after that, start a three-year CD. And so on.

CDs from banks have a fixed timeframe. However, brokerage firms buy and sell CDs like any other financial vehicle. (You probably have a brokerage account or two at the financial institution where your IRA and 401K live.) If you purchase a CD this way you are not locked into the timeframe, however, there is a risk of losing money if you need to sell early.

Like your checking account, CD’s are FDIC-insured up to $250,000.

As of this writing, CD’s have a top annual interest rate of 1.95% for 3 months, 2.00% for 3 years, and 2.15% for 5 years. Like everything else, it pays to shop around.

Photo by Michael Jasmund on Unsplash

US treasuries

Bonds issued by the US government are considered safe. There are three different types of treasuries, based on maturity date:

• Treasury bills (T-bills) mature in less than one year
• Treasury notes (T-notes) are issued with maturities of 2, 3, 5, 7, and 10 years
• Treasury bonds (T-bonds) mature in 30 years

You may keep them until maturity and enjoy a guaranteed interest payment—every six months for notes and bonds. Alternatively, you may sell them before they mature.

If you keep treasuries until maturity you enjoy a guaranteed rate of return. If you sell them, you risk losing money, as the price may have changed based on changes to interest rates.

Like CDs, the longer the maturity the better the return. Usually.

However, at certain times, you may read in the press that the “yield curve has inverted”. In this case, the usual expectation is flipped: longer maturity bonds have a return similar or less than the return of short-term bonds.

Series EE and Series I savings bonds

Series EE and Series I savings bonds are also issued by the US government and are also considered a safe investment.

Savings bonds are intended to be held for a long time, up to 30 years. At a minimum, you’ll need to hold them for one year. If you redeem them before five years, you’ll be “penalized” for the last three months of interest.

For example, if you redeemed one at three years you would only receive 33 months of interest (36-3).

Series EE and Series I differ in how interest is calculated. New EE bonds are paying a rather anemic fixed 0.10% rate at present.

Series I pay much better: they pay a fixed rate plus a semiannual inflation rate. The current composite rate, including both rates is currently 1.90%. Regardless of what inflation does, the combined rate will never be less than zero.

For those holding Series I bonds for the long-term, this added protection helps offset the detrimental effects of long-term inflation.

Savings bonds may be purchased online from the US Treasury directly.

Money market funds

Your brokerage account(s) have additional options for stashing your cash. One is the money market mutual fund composed of very conservative financial vehicles, including CDs and US Treasuries.

Within the fund, some of these will be held until maturity and some will be bought and sold.

Like any mutual fund, there are fees: look for the “expense ratio”, which should be low.

Likewise, mutual funds have an “expected” return, which is by no means guaranteed.

The advantage is that you can put money in, and pull money out, whenever you like.

Image by Michael Gaida from Pixabay 

US treasury mutual funds and ETFs

Mutual funds can also focus on US treasuries exclusively. Likewise, exchange-traded-funds or ETFs are available containing US treasuries.

ETFs are like mutual funds in that they contain a collection of many investment vehicles and are overseen by a sponsoring financial institution, such as Vanguard or Blackrock. Fees also apply, but they are usually much less compared to those of mutual funds.

ETFs are more flexible in that they can be bought and sold during the trading day, just like stocks or bonds are traded.

Because they represent a collection of things held, but also being bought and sold, they carry some risk. Like money market funds, the risk is low, but no returns are guaranteed.

Ultra-short bond mutual funds and ETFs

These mutual funds and ETFs carry a collection of bonds with “ultra-short” maturities, usually less than one year. These bonds may be US treasuries, municipal bonds, or even corporate bonds.

The biggest advantage of these funds is to protect against interest-rate risk. If you buy a bond, such as a T-note, and interest rates rise, you still get your guaranteed income if you hold the bond to maturity. But if you decide to sell your bond, it will be worth less than what you paid, because your old bond is locked into the old interest rate, and the shiny new bonds are paying the higher better interest rate.

Funds containing ultra-short bonds are always buying the new shiny bonds, so they work well in an environment where interest rates rise.

Ultra-short bond funds make a tad more than money market funds but should have less price volatility—or risk—than a short-term bond fund.

Like all mutual funds and ETFs, fees apply, and no returns are guaranteed.

Don’t forget about inflation

All the investment choices above are considered relatively “safe”. Some have a guaranteed rate of return and others carry some risk, but that risk is low.

Because there is little to no risk, the rates of return are also very low, with 2.5% about the maximum.

Except that’s the rate of inflation. Over the past few decades, since 2000, inflation has averaged 2.18%. As of this writing, the current inflation rate is 1.8%.

Basically, you’re breaking even.

If you are saving for a home, then the rate of inflation of homes in your area is more critical. In a “hot” market those homes may be appreciating at a significantly higher rate!

Can you save fast enough to keep up with the appreciation? Or do you need to bite the bullet and put down a smaller down payment so that you can purchase something sooner?

Down payment money from Your IRA

Removing money from your IRA before age 59½ may result in a 10% penalty, on top of the taxes owed.

One of the exceptions, however, is for a first-time home purchase. You may remove up to $10,000 penalty-free for this purpose.

However, this is not recommended. Your IRA is intended for your retirement savings. Once taken out, you can’t put the money back.

However, if you find yourself in a “hot market” with few options, your IRA may be a consideration.

If you are saving money for a short-term financial goal any of these options should work for you. If your goal is safety at the best rate, then CDs may be your best option. If you need the flexibility of accessing your savings, then Money Market funds or ultra-short bond ETFs are a good choice.

Good luck!

Additional Reading

• Index Fund Investing for Beginners. Get started saving for your long-term financial goals

• Teens: Start Investing Today in a Roth IRA. At what age should kids start investing?

• Twelve Things to Consider When Choosing a New Locale to Retire. Will moving allow you to stretch your retirement dollar?

First photo credit: Free-Photos from Pixabay 

This information has been provided for educational purposes only and should not be considered financial advice. Any opinions expressed are my own and may not be appropriate in all cases. All efforts have been made to provide accurate information; however, mistakes happen, and laws change; information may not be accurate at the time you read this. Links are included for reference but should not be considered an implied endorsement of these organizations or their products. Please seek out a licensed professional for current advice specific to your situation.