If you’re a millennial, there’s a good chance that you had some financial insecurities about purchasing a home before COVID-19. COVID-19 has brought those financial anxieties to a head; “if I wasn’t able to afford a down payment on a home in Los Angeles before, how can I do it now?” This article will briefly address how to buy your dream home that allows you to make a down payment notwithstanding the economic damage this virus has done. It should come as no surprise that the best place to put your money is primarily dependent on what your timeline for buying is.
- Buying Within the Next Three Months: Savings, Checking, or a Money Market Account
If you’re looking to buy soon, the safest bet you can make is placing your money in an FDIC-Insured savings account; if things go south fast, your money will be protected. The reason you don’t want to use a savings account for a long-term financial plan is the abysmal interest rate (between 2% and 2.4% at the high-end, provided you meet all of the institution’s requirements).
- Buying Within the Next Year, but Not Within the Next Three Months: CD Accounts
A certificate of deposit account (also known as a “CD”) is a very low risk investment but requires you to leave a sum of money in the account for a set period of time. The length of investment is positively correlated with the interest you will receive on the account (you will receive higher interest for a 10-year CD than you would a 3-month CD). An additional downside to the CD account is that you typically can’t add to your account after you’ve created an account. As such, if you are using a CD, go into it with a clear idea of when you’d like your assets to be available to you (there is a hefty penalty if you withdraw your money early).
- Buying a Home Within the Next Three Years, but Not Within the Next Year: 401(k) Accounts
A 401(k) is a retirement account, which allows you to make tax-free contributions to a certain limit (up to $19.5k in 2020), and seriously restricts your ability to withdraw from that account prior to the age of 59. Luckily, buying a home is an allowable reason to withdraw money from your 401(k); however, you will be penalized at a rate of 10% of the amount you take out (so if you withdraw $100k, you will receive $90k), and the amount you receive will be taxed (you will also have to report an additional $90k of income).
- Buying a Home Within the Next Five Years, But Not Within the Next Three Years: Investment Account
If we are all aware of one thing, it’s that the stock market can be a fickle mistress; 2008 and 2020 have taught us that. However, if you have a longer timeline to work with, the stock market generally gains value over time (so do houses, by the way). This article won’t suggest how you invest your money, but we do strongly advise mixing investments between high-risk and low risk.
Whatever route you choose, make sure that your money will be “liquid” (read “accessible”) when it’s time to buy your home. As a general rule, you want to have a nest egg that is sufficient to cover 20% of the total value of the home, as well as 3 to 6 months of mortgage payments – just in case something happens that would prevent you from making those payments – a pandemic that shuts down entire state for example.
At the Chernov Team we understand that knowledge is power, and we understand that getting a down payment on a house together isn’t as simple as closing your eyes and wishing. Knowledge of how to get to this goal is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.