Archive for August, 2015

Should I invest my down payment in the stock market?

Tuesday, August 18th, 2015

Question emailed to me: Let’s say my good friend has $100K. He has approximately one year to make this money grow until he has to buy a house. $20K of that is already in stocks, but doesn’t exactly know what he’s doing.

What would your advice be to make the most out of this one year given his current finances?

Answer: Does your friend want to put 20% down on a house? Does he/she have any other liquid assets? Lastly, do they know the price range of the house they want to buy?

With 100k and a decent-paying job they’d qualify for a 500k house, 100k (20%) for the down payment and a 400k mortgage.

If 500k is above or close to the range they’re looking for the house then no need to make a cent, protect the money and keep it in cash.

If they NEED more money for a down payment, then don’t invest to do it because mortgage lenders scrutinize
finances very thoroughly these days and need to be able to trace every cent you have to decide to give people a loan or not. They will not loan money to someone if they need to rely on unpredictable investment income to pay the mortgage (down payment might be less strict, but the source of the money needs to be trace-able – I just bought a house and or mortgage guy said “no mattress money” which is a problem if you are saving a lot of cash (literal
cash – not in a bank).

Now to answer the question as best I can without knowing all the details of your friend’s situation, for people with a chunk of cash that will be used in 12 months or fewer for a down payment on a home, put it in a high interest savings account. I pulled all my money out of stocks and investments 4 months before I bought my house. I missed out on 5-10% rate of return over those months, but you can’t predict the future, especially such a short window of time as 1 year in the stock market.

For all we know (and any “experts”) the stocks could crash 20% the day before he wants to take his money out. No one truly predicts the stock market with great accuracy, and if they did they would be ridiculously rich and not handing out advice here.

Also, if your friend invests now and sells within a year, they will be paying short term capital gains which is a much higher tax than holding for a 1+ years. So while you may make some extra cash, I can’t see it being enough to take that big of a risk.