Getting ready to buy your own home is one of the most exciting decisions you’ll make. So it’s important to save up your house down payment in a place that it will be safe and grow.
Where you save, all depends on when you start. Do you want to invest money and use that to pay for your down payment? Do you just need a simple savings account? We look at the best places to save.
High-yield savings accounts
When you’re saving money for anything, your first thought is probably to open a savings account, but basic accounts offer minimal, if any significant returns. That’s why, for short-term savings like your house down payment, a high-yield savings account such as those from CIT Bank or Discover serve you better.
If you plan to save for one to three years, you’ll want to have ready access to your money in case you find your dream home a little earlier than you expected.
The highest yielding savings accounts reach up to 1.75% interest, and while this isn’t the best rate of return compared to investments, it’s much better than the few pennies you earn a year from traditional savings accounts.
These are the high-yield accounts we recommend.
Certificates of deposit (CDs)
If you’re just looking for the highest return and don’t need ready access to a chunk of your money (which you shouldn’t if you’re trying to save it for a down payment), CDs may be the right answer for you.
Richard Rosso, a certified financial planner with Charles Schwab in Houston, has good advice when it comes to putting your down payment into CDs.
“…[build] a ladder in three-month increments, not exceeding one year. So if you have $50,000, you might put $12,500 in a three-month C.D. and another $12,500 in a six-, nine- and one-year C.D.’s. That way, if interest rates rise, you can reinvest the money from your expiring C.D.’s into one with a higher rate”
CDs typically have terms for three months to five years, so even if you’re saving for five years and don’t feel comfortable investing, you can put your money in CDs. You can also usually get a higher rate on longer term CDs.
Check out our best CDs rates to find one that’s right for you.
If you want to start saving for your house early, you could invest your money over the course of many years and potentially earn a high enough return to buy your house sooner than you thought. Although, if you’re not saving for a longer period of time, investments of any kind may be too risky to put your down payment savings into.
But say you get a jump on everyone and start saving (even a little bit) 10 years before you buy a home…it wouldn’t be a bad idea to consider investing in the stock market through a robo-advisor like Betterment or Acorns. Given a long enough timeline, you stand a chance of earning a better return on your money than leaving it in a savings account. The thing about investing, however, is that the markets are volatile. You’ll want to begin to sell off your investments and put your savings in cash a year or two before you intend to purchase your home.
Again, investing for a major purchase only works for those who will be in the investing game long enough to withstand short-term fluctuations in value.
If you don’t know where to start when it comes to stocks or mutual funds, here are a few suggestions.
Consider your IRA
If you’re a first-time home buyer, your IRA will let you withdraw up to $10,000 to go towards your new home. And if your partner or spouse is also a new homebuyer, you can both contribute $10,000. You won’t pay any fine for the early withdrawal, but you will have to pay income tax on this money.
This isn’t necessarily somewhere to put your savings for your down payment, but if anything, it’ll give you another reason (among many) to contribute to your retirement account.
When it comes time to save your house down payment, where you put your money will depend on how long you’re saving and the price of house you can afford. For short-term savings, a simple high-yield savings account is your best bet. If you’re saving for years before, an investment or CDs are great alternatives.