Saving to buy a home is both exciting and overwhelming. When my wife and I were saving to buy our first home, I thought we’d never have enough for the down payment. But somehow we came up with the money. One of the keys to our success was saving the cash in the right type of account.
These memories came flooding back when I received the following email from a reader named Matthew:
[My wife and I] have started a house fund, and it grows about 250 dollars every other week. It is in 2 savings accounts in Capital One 360. It now is currently about 13k. I would like to move about 10k of this into a better growing interest account for the next 2 years when we will be on the market for a house. What would be your suggestion of a “safer” low cost account to have this money work for us? I am hesitant to move it, as I need this money for a down payment and do not want to lose it.
Any insight would be greatly appreciated.
Matthew’s question is faced by many who are saving for a home or other purchase and will need the money in the next few years.
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. Make the wrong decision, and you could see your account balance decline. If you are saving to buy a home, here are five good saving options for your down payment.
In this podcast episode, I also cover riskier options
1. Savings Account
FDIC insured up to $250,000, a savings account is an ideal place to keep your cash while you save for the big day. The best option is a High Yield Savings Accounts at an online bank for two reasons. First, the interest rates at online banks, while not enough to make you rich, are generally higher than with traditional banks. And second, because you won’t be driving by the bank’s branch every day (they don’t have any), you’ll be a little less likely to spend the money. These accounts are easy to open, and you can get access to your money immediately when you find that perfect bungalow.
Here are some savings account options to consider:
Best Savings Account Deals
- American Express® High Yield Savings Account - Member FDIC: Earn 3.30% Annual Percentage Yield (as of 12/22/22) with no minimum balance required and no minimum deposit required to open.
- Chase Savings℠: Currently offers one of the best savings account bonuses you’ll find online, a $150 cash bonus
- CIT Bank: Earn up to a 1.00% APY with a Savings Builder account that only requires a $100 deposit to open. See details here.
- Barclays Online Savings: Earn 3.80% APY with no monthly maintenance fee and no minimum balance to open.
- Discover Online Savings-Member FDIC: Earn a 3.60% APY with no monthly maintenance fees and no minimum balance required.
CIT Bank. Member FDIC.
2. Certificates of Deposit (CDs)
As with savings accounts, most CDs are FDIC insured. Unlike savings accounts, however, there are generally penalties if you withdraw the money before the term of the CD elapses. The penalty can be a helpful deterrent if you fear you may be tempted to spend the money.
Alternatively, you can invest in short-term CDs with durations of 3 to 12 months. Or you can put your money in a no-penalty CD, which as the name suggests, doesn't charge a penalty if you decided to take the money out early. Keep in mind that the longer the CD term, the more interest you'll typically earn.
Given Matthew's 2-year time horizon, I'd look seriously at Ally's 2-year Rising Rate CD. Should prevailing rates rise during the 2-year term of the CD, Ally's Rising Rate CD allows you to opt for the higher rate. You can only exercise this option once during the 2-year term, but it does protect you should rates start to rise.
Here are some CD options to consider:
Factoid: According to the National Association of Home Builders, the average age of a first-time homebuyer is 33 and the average first-time buyer household had an income of $64,074.
Related: What Are Seasoned Funds for Your Down Payment?
3. U.S. Treasury Bills
U.S. Treasury bills are obligations of the federal government that matures 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.
If you go this route, I'd suggest I bonds purchased through Treasury Direct. But keep in mind that you cannot redeem these bonds for one year, and there is a small interest penalty if you cash in the bonds before five years.
You can consider shorter T-Notes as well. The yields on a 2-year T-Note, however, are lower than an online savings account.
4. Reward Checking Account
With the right checking account, you can save money in an FDIC-insured account and earn some perks at the same time. Some checking accounts offer bonuses to new account holders. A favorite of mine is FNBO Direct, which pays one of the top interest rates I’ve seen. You can check out the details on our list of free checking accounts.
5. Money Market Account
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.
If you’re already investing--which you should be--you might be investing with Wealthfront, an awesome robo-advisor. Wealthfront now has a cash account that you can drop your savings into and earn a decent APY--currently 4.30% APY. The account is FDIC-insured up to $3 million, so it’s a great place to store money for a down payment, and you can make as many free transfers as you want--which is nice if you have incidental expenses before, during, and after buying the home.
Read more: Wealthfront Cash Account full review
And a new feature that was just launched is the ability to have checking features. So you can now have a debit card for purchases, the ability to pay bills online, and have your paycheck direct deposited into the account (plus, you can get it up to two days early).
On top of that, you’ll be able to pay others using apps like Venmo and Cash App, you can deposit paper checks with your phone, and you can even get cash from over 19,000 ATMs nationwide. Plus, you’ll still earn the same great 0.35% APY--which beats most checking accounts these days.
Where should I store cash if I plan to use it in a few months?
If you plan to use your cash within the next few months, the best place to keep it is in a savings account. Savings accounts are insured by the FDIC, making them virtually risk-free. They’re also easy to access so you can quickly get your money out of the account when you do need it. For slightly longer-term storage, you can put the money in a CD. CDs sometimes offer higher interest rates, but only let you withdraw money when the CD’s term ends. If you know exactly when you’ll need the money, you can set the CD to expire right when you’ll need the cash.
Is it safe to keep a down payment for a house invested in the stock market?
The risk of investing money in the stock market is that you’re taking a risk. If the market drops, you’ll lose money. However, investing can be a good way to grow your nest egg, giving you more money to use for a down payment. The answer comes down to risk tolerance and your timeline for buying a home. If you’re looking to buy in the next month, you shouldn’t keep the cash invested because a stock market crash could leave you without a down payment. If you’re not planning to buy for a decade, investing is probably a good idea. It’s up to you to decide on your personal risk tolerance and when you plan to buy a house and use that to inform whether to keep your down payment in the market or to withdraw it to a safer place, like a CD or savings account.
Is it possible to have too much money saved?
There’s not really such a thing as having too much money saved. The more cash you have, the more financially secure you are. However, there is such a thing as having too much money in one place. The FDIC only insures up to $250,000 per account type, per depositor, per bank. If you have more than that much, you should split your balance between multiple banks to keep it all insured. Even before that point, you should think about the best way to deploy your money. If you have a huge amount in a savings account, but no plans to use it in the near future, you could earn more by investing some of that money. Leaving it in a savings account earning almost no interest is a significant opportunity cost. While having an emergency fund is important, take the time to think about where you’re keeping your extra cash and how you can best allocate it between different accounts.