The Best Place to Keep Your Down Payment Savings

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January 14, 2021

There’s countless housing forums about how to save for a down payment on a home and how to cut costs. However, where you stash this money is just as important as saving it. Where you keep this money while you save will depend heavily on your buyer timeline and risk tolerance. We’ve compiled a list of the best places to put your down payment savings below.

Store your down payment funds in a high yield savings account

If you plan to buy a house in less than a year, the best place to store your funds is a savings account. This will give you easy access to your money and provide liquidity when you need it most. 

The downside of traditional savings accounts is they tend to have low interest rates. To give your savings a boost, open a high-yield savings account at an online bank like Ally or Marcus. These banks often have a much higher annual percentage yield (APY). This allows your nest egg to earn money for just sitting there, helping you reach your savings goals faster. 

Most of the big banks in the United States offer an APY of less than 0.06 percent while several online banks offer around 0.5 percent. It may seem like a small difference, but every little bit of extra cash helps when you’re trying to purchase a home.

Just like traditional banks, online banks are FDIC insured, meaning that you can rest easy knowing your money is safe.

Put your down payment funds in a CD (certificate of deposit) account

A certificate of deposit, or CD is a type of savings account with a fixed term length and fixed APY. These accounts also have a restricted withdrawal date, called a maturity date, that can be as short as three months or long as five years. 

Putting your money in a CD is a great way to boost your savings in the short term. Because of the restrictions on withdrawal dates, CDs offer a much higher APY than regular savings accounts. If you have a “set it and forget it” approach to saving and know you won’t need to withdraw funds before their maturity date, lock in the favorable rates of a CD. Typically the longer the term date, the higher the APY offered. 

That said, CDs are far less flexible than traditional savings accounts. Customers will incur a fee for withdrawing money before the account’s maturity date. Like savings accounts, CDs are FDIC insured, and widely available products you can find at any bank or credit union.

Use an investment fund to save for a down payment over time

If you are just starting to save for a home and don’t plan to buy within the next five years, investing the money may be a better option for you. However, this strategy largely depends on your risk tolerance.

For this, you’ll need a brokerage account and not an IRA or 401K, which are used for retirement and often incur penalties for withdrawing funds early. If you have a low risk tolerance, the safe bet is to invest in an exchange traded fund or ETF that consists of multiple securities. Instead of picking individual stocks, an ETF allows you to own a basket of stocks, with some funds having hundreds or thousands of stocks in their roster. An example of an ETF you may be familiar with is the S&P 500, but ETFs can contain a variety of investments like bonds or be industry specific. 

Before taking the investing plunge, consider speaking with a financial advisor who can provide advice based on your individual needs. Investing is risky, as returns  are not guaranteed nor are they FDIC insured. If the stock market happens to tank right when you need to pull money out, you will be out of luck. 

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