Should You Cash Out Your I Bonds to Buy a Home?

It may be tempting, but right now, it's better to hold off.

There's a reason buyers have been struggling to purchase homes over the past couple of years. Home prices have been elevated since the latter part of 2020. And while home price gains have slowed down this year since peaking in June, sellers are still looking at commanding higher-than-usual prices for the properties they list. When you throw higher mortgage rates into the mix, it's easy to see why affordability could be an issue for so many buyers.

If you're interested in buying a home despite today's challenging market conditions, it will likely take more money than usual -- especially if your goal is to make a 20% down payment on a home. But doing so is a good idea.

Not only will making a 20% down payment help you start off with more equity in your home, but it will also help you avoid private mortgage insurance (PMI). PMI might sound like it's a good thing, but it's actually meant to protect your mortgage lender, not you. And it can make your ongoing housing costs more expensive.

Now, you may only have so much money sitting around in your savings account to put toward a home down payment. But if you have investments you can liquidate, those could help you scrounge up more down payment funds.

In fact, if you own I bonds, you may be considering a redemption to come up with money for your down payment. Right now, selling stocks may be a less appealing option due to the broad market being down and the likelihood of you taking a loss. But if you own I bonds, that's less of a concern since they're government-backed, so you don't have to worry about them losing face value.

But is cashing out I bonds to buy a home a good idea? Here's why it probably isn't.

You'll be hit with penalties

Once you purchase I bonds, you're required to hold them for a full year. From there, you can cash them out, but if you do so before holding them for five years, you'll be penalized. Specifically, you'll lose your last three months of interest.

That may not be a catastrophic sum in the grand scheme of your life. But still, the whole point of investing in I bonds these days is to enjoy a generous amount of interest. So you probably don't want to give some of that interest up.

You'll lose the chance to keep earning a higher return on a safe investment

It's possible to build a portfolio of stocks and generate a return of 8%, 10%, or more. But in doing so, you're taking on a fair amount of risk.

I bonds aren't very risky in terms of face value since they're government-backed. In other words, $10,000 of I bonds will be worth $10,000 even if the stock market tanks. But right now, I bonds are paying 6.89% interest though April 2023. That's a high rate, and comparable to what you might get with stocks -- only without the risk. And so you probably don't want to pass up the chance to score such a great rate on such a stable investment.

What's the right call?

Cashing out I bonds for a home purchase might seem tempting. But there are drawbacks to going this route. Consider those carefully before redeeming your I bonds, especially if you haven't yet held them for five years.