Buy or Rent? And Where to Park Your Down Payment until You Decide?

Dear Carrie,

My husband and I live in the San Francisco Bay Area and have been debating continuing to rent versus buying a house. Meanwhile, our down payment savings is making less than 1 percent interest. My financial consultant said not to move it into stocks if we need these funds in the next 5 years, but it’s hard to accept such a low rate of return. I’d love your thoughts on this.

— A Reader

Dear Reader,

First, let me say that I agree with your financial consultant. Money that you think you’ll need in the next two to five years definitely shouldn’t be in the stock market. Yes, it’s hard to see it making so little interest, but just think how much harder it would be to have to sell at a loss when you need the money to buy your home.

There’s really no way around it. As a general statement, higher returns mean more risk; lower returns mean more safety. You could try to inch up the return a bit by investing in CDs, but don’t go out too long or you could end up paying a penalty for an early withdrawal.

On the bright side, you’re lucky that you have a down payment, and hopefully you’re continuing to save. Ideally, you want to be able to put at least 20 percent of the purchase price down so that you can avoid paying mortgage insurance. However, when it comes to the rent vs. buy debate, there are a number of other things to consider beyond your down payment.

Start with your personal reasons for buying

While the general rise in home prices across the country has a lot of folks thinking about buying, I always counsel taking a step back and looking beyond the numbers. That’s because home ownership is as much personal as it is financial. For example, some people derive satisfaction from owning and caring for a home, while others think of it as a burden. Some people get a sense of security from home ownership, while others may see it as a loss of flexibility. Think carefully about what it will mean to you. And in any case, I advise you not to think of your home as an investment. If its value increases, that’s great. But you can’t count on that, especially in the short term.

Look at the long-term financial reality

If you’re emotionally ready to be a homeowner, then it’s time to run the numbers. And not just the initial numbers that will get you into a home — down payment, closing cost, fees and assessments — but also the ongoing financial obligations.

A big mortgage can be a tremendous source of stress if times get tough. You want to be sure you’re not stretching yourself to the limit from day one. If paying your mortgage will mean you have to compromise on other financial obligations, you may need to rethink the situation.

Therefore, before you commit to a home, make sure that you aren’t carrying credit card debt month to month and that you have a substantial emergency fund (equal to a minimum of three months’ essential expenses, including your new mortgage). Also make sure that you are saving adequately for retirement, and that you are confident that you will be able to continue contributing after you are a homeowner.

And remember, your mortgage is just a part of the overall cost of owning a home. There are property taxes, insurance, repairs and maintenance, and perhaps even renovations — all should be factored in from the start.

Do a rent vs. buy comparison for your area

There’s no cut and dried way to determine whether you’re better off renting or buying. So much depends on location. In fact, costs can vary significantly not only from city to city, but in different parts of the same city. In the San Francisco Bay Area where you live, both rents and property values are generally high across the board, and continuing to rise.

There are a number of online calculators to help you figure out the overall cost of buying vs. renting. has an easy one. The interactive calculator at gives quite a range of information, including how long you’d need to own the home before buying would make economic sense.

Carefully consider your timetable

Which takes me to the next point. Even if you live in an area where prices generally appreciate (such as San Francisco), you can’t count on that continuing. As we all saw during the recent recession, prices can drop precipitously short-term. And even in the long-term, prices can certainly dip.

Therefore, buying a house is a long-term proposition. Before you commit, look at your job stability, your desire to remain in a particular location, and your willingness to spend the time, money and energy it takes to maintain a home. From a financial perspective, five years seems to be the magic number. Unless you plan to own a property at least this long, buying probably won’t work in your favor.

Get pre-approved

If you’re serious about buying, be sure to get pre-approved for a mortgage. With your down payment at the ready and a clear idea of how much house you can really afford, you’ll be in a much better buying position in today’s quite competitive market.

I know none of this will increase the return on your current down payment, but think of it all as an investment in your ability to get the house of your dreams. That’s a return you can enjoy for many years to come.

Looking for answers to your retirement questions? Check out Carrie’s new book, “The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions.”

Read more at You can e-mail Carrie at This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


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