Individuals, couples or families that are ready to buy a home have often saved for many years to have the opportunity to live “The American Dream.” Accordingly, it is important that the money set aside for the down payment is easily accessible and in a safe, secure spot, i.e., now would not be a good time to take risk and put that cash in a private equity fund.
To be on the safe side, those who are about ready to purchase a home should put their money in “cash equivalents” that are protected by the FDIC or the United States Government. In doing so, one might sacrifice return, but will have the peace of mind that the money will be available when needed. The following are five suggestions as to where one can safely stash the cash:
1. FDIC Guaranteed Bank Accounts: These bank accounts include checking and savings accounts at FDIC member banks. Your money will always be accessible without penalty when the bank is open and via the ATM at any time (barring any ATM withdrawal limits). Additionally, if the bank fails, the government will reimburse you up to $250,000 (now permanently increased to $250,000 per depositor) as a result of the FDIC – Federal Deposit Insurance Corporation. For those accounts which are under this dollar amount, these demand accounts, as they are otherwise known in the industry, are virtually risk free.
2. FDIC Insured Certificates of Deposit (CD’s): Offered by FDIC member financial institutions such as community banks, a CD is a contractual obligation with a bank whereby the client (the lender) receives a guaranteed rate of return for lending money to the bank for a specific period of time, usually ranging from three months to five years. Typically, the longer the time period the client agrees to lend the money to the banking institution, the more interest they will receive. If the funds are not needed for quite some time, one can loan money or invest in a CD that has a longer maturity. It is important to plan accordingly, however, because cashing out of the CD prematurely will result in a penalty; often times, banks may charge as much as six months’ worth of interest. If you know you will not buy a home for at least three months, a CD could be a viable option for you.
3. U.S. Treasury Bills: U.S. Treasury bills are obligations of the federal government that mature in one year or less. They are considered to be virtually risk-free as they are backed by the full faith and credit of the U.S. government. Treasury bills are purchased at a discount and upon maturity the investor receives the full face value. To make the investment worthwhile, financial experts suggest purchasing at least $10,000 or $20,000.
4. U.S. Savings Bonds: US savings bonds can be divided into two types: Series I savings bond and the Series EE savings bond. If you are more than a year away from purchasing your home, savings bonds are ideal investments because investors are guaranteed to never lose money.
5. Money Market Accounts: A money market account is another great way to insulate your money while earning higher interest rates (based on the amount you have to deposit). Money market accounts can be purchased through your local bank and should not be confused with money market funds, which are similar to mutual funds, yet buy cash equivalents as investments. Money market accounts are almost always FDIC insured if your bank is a member financial institution. Make sure to always confirm that this is the case, however and know that there are withdrawal restrictions.
As always, one must consider their time frame and risk tolerance. A down payment on a home is not money that can be lost. Investors must realize that parking their money for the short-term in a safe place will give them peace of mind but most likely a lower return. The key is liquidity, safety and accessibility. After all, your home will most likely be one of your biggest investments.
Published or updated August 1, 2010.
