Published on April 17th, 2019 | by Chuck13
Digs Savings Account Review: Savings Account Alternative for Home Buyers
Below is a guest post from Evan Mullen.
Digs Savings Account Alternative
The Digs savings account is a unique alternative to the traditional savings account, specifically for future home buyers. With the Digs savings account, interest is paid in the form of a match contribution per month, similar to a 401(k) matching plan (see this page). Additionally, the match that the user earns is tax-free. The account has additional features, such as expert content & advice, a home buyers checklist, and lender recommendations.
The account costs $1/month to use, and has four contribution tiers:
- First $50/month yields 20% matching (maximum of $10)
- Next $100/month yields 10% matching (maximum of $10)
- Next $200/month yields 5% matching (maximum of $10)
- Next $1,000/month yields 1% matching (maximum of $10)
This comes out to a total potential of $40/month if contributing $1,350, or $39/month if considering the monthly fee. These earnings also expire after five years.
The account is FDIC insured up to $250,000. However, the catch is that the match earnings are only accepted as part of a closing cost by a specific network of lenders, who have partnered with Digs. Currently, there are only five lenders in-network (see this page). I spoke to Digs support and they claimed that they would have 10 more in-network lenders by the end of 2019.
Two financial considerations when deciding whether to use this account: (1) Total Digs earnings compared to after-tax earnings from the same amount of money in a traditional savings account (2) The best in-network mortgage rate compared to the best out-of-network mortgage rate, and if the difference in interest outweighs the additional earnings in the Digs savings account or not.
I have developed tables to help determine this, since there is a lot that goes into this.
The first analysis calculates an equivalent APY of the Digs savings account, so it can be directly compared to the APY of your current account. In general, the tables show that the fourth Digs tier isn’t even worth contributing to until you are about 12 months away from purchasing a home, with the current APYs being around 2% or more. This also depends on your tax bracket though, so that is why you will see columns corresponding to different tax brackets.
The second analysis determines how much lower an out-of-network lender’s mortgage rate should be to outweigh using an in-network lender (due to the amount you save in paying less interest on your mortgage outweighing the Digs contributions). This analysis assumes that you would be earning the full amount from the Digs account (contributing the maximum to all tiers for five years). Decreasing how much you contribute and/or the duration of your contributions will only make the out-of-network mortgage rate that makes Digs unprofitable move even closer to the in-network mortgage rate (meaning it will be even less likely that using an in-network lender with the Digs match contributions will be more profitable than using an out-of-network lender with a traditional savings account).
- Example 1: I am in the 22% tax bracket, and I plan on buying my home in 12 months. From the table, I will get 45.17% equivalent APY on the first $50/month I contribute, I will get 24.49% equivalent APY on the next $100/month I contribute, I will get 12.04% equivalent APY on the next $200/month I contribute, I will get 2.38% equivalent APY on the next $1,000/month I contribute.
- Since my current APY is 2.35%, I should contribute to all four tiers.
- Example 2: I am in the 12% tax bracket, and I plan on buying my home in 60 months. From the table, I will get 8.52% equivalent APY on the first $50/month I contribute, I will get 4.91% equivalent APY on the next $100/month I contribute, I will get 2.52% equivalent APY on the next $200/month I contribute, I will get 0.51% equivalent APY on the next $1,000/month I contribute.
- Since my current APY is 2.7%, I should only contribute to the first 2 tiers.
- Example 3: I predict my mortgage will be $200,000. I predict my mortgage rate will be 4.4% from an in-network lender. From the table, the out-of-network mortgage rate to beat is 4.345%.
- Since I believe I can get an out-of-network mortgage rate below 4.345%, using the Digs savings account would not be beneficial.
Since there are still many unknowns when deciding to use the Digs savings account or not (such as what mortgage rates will be like when you are ready to purchase a home, APY of traditional savings accounts along the way, etc), it may make more sense to diversify and only contribute to the first tier. This way, if you end up going with an out-of-network lender at the time of home buying, you’ll only have lost out on the interest of $50/month from your traditional savings account. Plus you’ll be able to use the Digs savings account’s other features, like advice from experts.
Thanks to Evan Mullen for this guest post.