Ideas for Earning Interest on House Down Payment Money?

[Gilberto de Piento]

I've got about $30,000 in cash very tentatively earmarked for a house down payment sooner or later. It is currently in a checking account earning no interest. I should really do something with it. 2% would earn about $600 per year or $50 per month. I've had CDs before so I could easily get more CDs. Any other ideas?

[jacob]

Short term treasury ETFs? E.g. SHY, SCHO, TUZ. Yields are around 0.8% and durations are around 2 years, so if interest rates are hiked 0.25%, you'd lose about 0.5% of the principal.

What's the holding period on a 2% CD these days?

Personally, I'd just leave it sitting in cash or get CDs that line up with when I need it because cashing out early usually comes with a penalty.

[cmonkey]

For my credit union, 2% CD is locked away for 5 years. I would guess similar for other institutions. Personally I'd just hold it in cash in a savings account, as I can't think of anything that would give you some yield, or if the time line is longer than the CD length, I'd just get more CDs.


oooor perhaps just put it in GE.

[pk+]

Depending on expected period, I would:
a) stick to short term (3-6 months) bank deposits (pick whatever is best at each renewal, 3% - inflation in my country), but who wants to bother with picking best options several times a year? (:P).
b) or buy 2 year treasury bonds (2.1% - inflation in my country, penalty for early shorting is capped to ~6months gains, no option for nominal loss).

Inflation in Poland is close to zero now, rates were typically bigger with higher infl.

[Fish]

I kept my down payment money in 1-year CDs, and simply ate the penalty (3 months’ interest) when it was needed. This was nearly a decade ago. At today’s CD rates I might not bother.

Ally Financial has a 11-month “no penalty” CD with 1.50 APY, min deposit 25k. Online banks have savings account yields approaching this. Another alternative is to switch banks and collect their sign up bonuses, which usually require a large balance + direct deposit. Then rinse and repeat with another bank after the bonus clears. You’ll have to do the math and decide whether it’s worth your time.

Some riskier ideas for consideration: 1) Buy stocks right before they go ex-dividend and sell immediately after to minimize exposure. Due to the short holding period, such dividends are non-qualified and will be taxed as ordinary income (but so is interest on deposit accounts). 2) Sell puts (could also use a put spread to minimize downside).

[halfmoon]

Fidelity sells brokered CDs with no fee for new issues; probably some other brokerages have a similar setup. At Fidelity, you buy as many as you want of each lot (each CD is $1000), choosing from a variety of banks, settlement dates, terms and rates. They're all FDIC insured. Right now, you can get 6-month CDs at 1.35% and 9-month ones at 1.45%. It's not the stock market, but it's better than zero. You can apparently sell them mid-term through Fidelity if you need the money earlier, though I haven't looked into this.

The 6-month holding period would net you $203, and the 9-month one $326. If that's not worth a little effort, then why are we eating lentils?

[SustainableHappiness]

In line with what Fish said, In Canada, there are a few online banks that are actively trying to get customers and are offering higher interest rates for the first 6 months you invest in the savings account. 1 for example is Tangerine, who gives you 1.9% interest for the first 6 months you are in their savings account. If you open up a chequing account as well, you get 2.4% for 6 months.

I'd look out for online banks like this where you live as opening a savings account with these guys is generally easy as they are built on a good online customer experience. The beauty is, there is no withdrawal penalty. Well, except the work of opening/closing accounts.

[SustainableHappiness]

My friend and I did a stint where we were gaming the rewards systems a little bit and got $100 referrals from these banks then transferred the cash out and closed the accounts. It was fun feeling like we'd got away with something, but I don't think it'd be worth the effort to do again.

[Gilberto de Piento]

Thanks for all the suggestions! I ended up getting a CD for $25,000 through Ally. The rate is slightly better if you put at least $25,000 in. This will return about $350 per year or about $30 per month that I wasn't earning before.

Although I said above that I have 30k in cash I actually have close to 50k, I wasn't counting the rest because it is in checking with most of it earning 1.4%. In a few months when I have a total of 25k in checking I'm going to put it in another CD. Then I'm done saving for a house and am going to start investing outside of my tax advantaged work account.

[2Birds1Stone]

You can get 1.35% from high yield savings. CIT, Capital One 360, etc.

I have a Capital One 360 CD as well, pays 2.35% interest and the early withdrawal penalty is just 6 months interest.

[OTCW]

Capital One 360 has relatively decents rates for cds and money markets right now

[suomalainen]

LQD - corporate bonds etf. Fairly low volatility and yields around 3% or 4% as I recall. Whether the volatility risk is acceptable depends on your tolerance and your views on interest rate moves over your hold period.