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Dr. Don Taylor, CFA, Bankrate.com advice columnistBuy home now or save for later?

Dear Dr. Don,
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?

We've already established the "pay our savings first" habit for six months. The question I have is, "Where do we put the money to earn more?" Thanks a lot!
-- Heidi Housing

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Dear Heidi,
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.

I'm going to bootstrap a few numbers that might get you to take 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.

I'll admit to pulling the 5 percent number from thin air. I don't know what will happen to housing prices in your market over the next five to seven years. My 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 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 interest rates on a mortgage 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 home prices in your region? How long would a home that you can afford to 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.

Bankrate has an interactive work sheet that does a nice job helping you think through the rent-versus-buy decision.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: Jan. 12, 2007
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