Save more for a down payment or invest

Putting more towards your down payment can be thought of as guaranteed ~6.2% (savings rather than return) until you refinance. Markets have historically returned more than that, but they aren't guaranteed to do so. A 6.2% return is often better than the bond returns, so this could also be thought of as your more conservative allocation (may be a moot point if you are 100% equities). Now, others have pointed out that you can refinance if interest rates drop, but interest rates don't usually drop rapidly and there is still a cost to refinancing so it may not be worthwhile unless it is a big enough drop. Rates just went up (again), and aren't expected to drop anytime soon. Rates are very unlikely to hit the pandemic lows in the foreseeable future… yes they dropped below 3%, but our interest rate before the pandemic was around 4% . So even in that crazy environment rates did not drop by a huge amount.

Now, if you aren't maxing out your pre-tax accounts and you would have a relatively high marginal tax rate on the income you with held for the down payment, then that changes the calculation because you would be guaranteed to pay that tax rate on the additional funds.

Everyone has their own tolerance and I agree with others that the bigger picture matters. But FWIW, we are also looking to buy a house and plan to put a larger down payment which will reduce our interest rates and help us have mortgage payments that we are comfortable with. We also do not feel the need to save aggressively for retirement (especially pre-tax) because we already have a lot saved and our tax rate with be lower this year than we had in other years because of a moni-retirement and job change. So our circumstances are likely different than yours.

You will have to make a trade off somwhere in order to make the dream/goal of home ownership happen.

Let's say you have 3 options.

1. Invest all of your extra money and never purchase a home because you think investing will always win in the long run.

2. Pause ALL investing anything in order to save your downpayment as fast as possible.

3. Make trade offs somewhere in between.

   Depending on how quickly you want your down payment vs what investing opportunity you are willing to trade off.

   a. More aggressive: only do your 401k match and ignore HSA, Roth, etc, to save for home more quickly

   b. Less aggressive: 401k match, max HSA, max Roth, save additional for home a slower

   c. Somewhere in between that allows you to save your desired amount per month for down payment

Your timeline is important as well. If you want to get into a home asap, you need to be okay with prioritizing that over potential lost investment gains.

If you are okay with saving up for a downpayment taking 2-5 years or more, then split the difference where it makes sense for your goals.

Good luck!

I have a similar situation, although maybe slightly different. I've been investing heavily for some time, but now I want to start preparing for buying a house. Due to my personal situation, I won't be ready to buy a house for two years. So I've planned out the monthly saving I'd need to do each month for reaching my 20% down payment amount 24 months from now and the rest I will invest as per normal.

If your question instead is paying down mortgage more aggressively or minimum mortgage payment and invest remaining, financially the latter will usually give you more money in the end, but sometimes the former is better psychologically if it helps you sleep better. I'm not at that stage yet since I don't have a house, but currently what I'm thinking I personally would do is: if the market is high I would aggressively pay down mortgage, but if the market takes a downturn, I'd see that as a great opportunity to invest so I'd switch to making minimum repayments and invest the rest.

Is your mortgage rate higher or lower than you can earn, on average, by investing? If lower, put down the minimum you can, pay the minimum you can and invest the rest.

That is a trick question, though, because if rates are “high” today, it is likely that you can refi to a lower rate in the future (e.g. during the next recession, whenever that comes), and then lock that in for the next 30 years. So the answer is always to invest.