Apply for a Mortgage Now or Invest and Wait?

Don Taylor, CPA from Bankrate.com, responded to the following important question:

Q: My husband and I are planning to save a down payment of $50,000 for a house in five to seven years. We’re starting from scratch here. Should we put the money into a money market account or invest the money in mutual funds?

A: With a five- to seven-year investment horizon, it’s pretty easy to justify investing some of this money in mutual funds investing in stocks and bonds versus staying in money market accounts or certificates of deposit.

Part of that decision depends on your tolerance for risk, meaning your ability to accept that your investments will go up and down in value depending on where the overall markets are heading in general and your investments in particular.But what about an alternate approach?

If the $50,000 investment goal represents a 20 percent down payment on the house, you’re looking at a $250,000 home. What’s great about a 20 percent down payment is that you won’t have to pay private mortgage insurance, or PMI, on the loan.

The downside is that if homes in your market are appreciating by an average of 5 percent annually, a $250,000 home in today’s market will cost about $320,000 five years from now and $352,000 seven years from today. So instead of looking at what $250,000 can buy you today, look at homes in your market priced today at $178,000 to $196,000.

Granted, the 5 percent number is pulled from thin air. We don’t know what will happen to housing prices in your market over the next five to seven years.

The point is that in real estate markets with rising prices you can be better off buying a home with less money down and paying the PMI or taking out a piggyback home loan and buying now versus waiting to achieve a down payment savings goal five to seven years out.

Locking in today’s relatively low fixed mortgage interest rates also can work toward a lower monthly payment.

FHA loans are another way to finance a home with a low down payment. Instead of paying PMI, you pay for a government guarantee on the mortgage called the mortgage insurance premium, or MIP.

Try to consider the big picture. How long do you plan to live in the area? What’s happening to prices in your region? How long would a residence that you can afford to home mortgage finance today continue to meet your needs - for space, schools, etc.?

If you expect a lot of changes in the next five to seven years, then saving for the down payment can make more sense than buying today or in the next year or two.