Investing While Saving for a Down Payment: Weighing Opportunity Costs

When saving for a down payment on a home, one of the key decisions you'll face is whether to invest the money or keep it in a low-risk investment like a savings account or US Treasuries. In this article, we'll explore the opportunity costs of investing the down payment money versus keeping it in a low-risk investment, and how these costs compare to mortgage interest rates. We'll also discuss the risks associated with investing the down payment money and how they compare to the risks of not investing and potentially missing out on market gains.

Opportunity Cost of Investing the Down Payment Money

The opportunity cost of investing the down payment money is the potential return that could have been earned on the invested amount. For example, if the down payment is $50,000 and the expected annual return on investment is 5%, the opportunity cost would be $2,500 per year. This means that by investing the down payment money, the individual could potentially earn $2,500 more per year than if they had kept it in a low-risk investment. However, it's important to note that investing also comes with higher risk, and the actual return may be higher or lower than the expected return. Additionally, the opportunity cost should be considered in the context of the individual's overall financial situation and goals.

Potential Return on Investment vs. Mortgage Interest Rates

Based on the information provided, let's compare the potential return on investment (ROI) with the interest rates on mortgages and discuss how this might change over time.

First, let's consider the potential ROI on investing the down payment. According to the Wealthfront Cash Account, it offers an industry-leading 4.00% APY. If we assume an annualized return of 7% for a diversified portfolio (similar to the Wealthfront Classic portfolio), the potential ROI would be higher than the current mortgage interest rates.

As of 2025, the average 30-year fixed-rate mortgage interest rate is around 3.5%. This is lower than the potential ROI of 7% on a diversified portfolio. However, it's important to note that mortgage interest rates can change over time. If interest rates rise, the potential ROI on investing the down payment might become less attractive compared to the mortgage interest rate.

For example, if mortgage interest rates increase to 5% or 6%, the potential ROI on investing the down payment would need to be higher than these rates for it to be a more attractive option. Conversely, if mortgage interest rates decrease, the potential ROI on investing the down payment might become more attractive.

Risks Associated with Investing the Down Payment Money

Investing the down payment money exposes you to market risks, such as fluctuations in stock prices, bond yields, or real estate values. If the market performs poorly during the time you're saving for a down payment, you might lose some of your investment principal. Additionally, there's a risk of not being able to liquidate your investments quickly if you need the money for a down payment. On the other hand, not investing the down payment money and keeping it in cash or a low-risk investment like US Treasuries means you're likely to miss out on potential market gains. While cash is low risk, it may not earn enough interest to keep up with inflation, which could lead to a loss of buying power over time.

In conclusion, investing while saving for a down payment can be a viable option, depending on your individual financial situation and goals. By understanding the opportunity costs, potential ROI, and risks associated with investing the down payment money, you can make an informed decision about whether to invest or keep the money in a low-risk investment. It's essential to monitor changes in interest rates and adjust your financial strategy accordingly.