Where to Sock Away A Down Payment for A Home?

Hi guys -

Any help or advice you could offer would be kindly appreciated.

I am a 27 year old female, currently with $13,500 in debt (student and car loans consolidated at 3.9% APY for lifetime of loan) and am slowly taking huge chunks out my debt with large monthly payments. I plan to entirely eradicate this debt over the next two years.

I also have $3,500 stashed away in an online savings account at 5.17% APY. Where would be the most prudent vehicle to sock away savings for a down payment on my first home? Basically I will need to be able to access this savings in approximately three years.

With a 3 year time horizon, your high yield savings account is probably the best place to continue saving until you reach your goal. This is especially true for first time home purchases. I have seen many people who have told me that their goal is 3 years, only to get a call from them one year later saying that they have found the perfect house and want to "go for it".

I realize that paying down debt makes one feel great and frees you of many burdens, but you do realize that you are forgoing a higher interest rate on your savings account than the interest rate you are paying on your loans?

Essentially, you are actually losing 1.27% (5.17% savings - 3.9% debt) by paying your loans instead of stashing it in your bank account. Of course, you then must then throw in the tax deduction/credit for the interest on the student loans which brings the rate down about 3%. This compounds the loss to the neighborhood of ~2% on every dollar you divert away from your savings account to pay down your debt.

People worry most about debt when they can't pay it. When you save the money elsewhere at a higher rate than the interest payment, you should feel secure knowing that you are making the most of your finances and have the ability to pay it off at any time should you choose to do so.

You may want to consider slowing up on the repayment and stashing more, more, more into your savings. If it drives you too crazy, just take the money from your savings and pay it off.

Hi Pricespecter,

Thank you for your reply. I completely agree with the sensibility behind paying off the $13,500 debt at a leisurely pace. However - I should have mentioned previously - the debt is a private loan with a relative and unfortunately does restrict me to a more stringent repayment schedule, as per our agreement. The debt was originally over 7.8% APY, therefore I chose to sacrifice knocking it out early at the lower 3.9% rate.

Fully understood Cassie. Family first when it comes down to that! Your high yield account is still most likely your best vehicle for money you might need in a year...or three. Best wishes.

After factoring in taxes on the 5.1% savings account, it's a wash between saving and paying off debt. However, you'll need the cash more in the short term than you'll need lower debt, so save save save! Believe me, you'll need the money when you buy your house. You can never save up enough for it.