Best Places to Keep Your Down Payment
Now that your home-buying journey is on hold, you need a safe place to stash your cash. Here are the best places to keep your down payment.
A savings account can be a simple and easy choice. You likely already have one at your bank or credit union, where you have a checking account.
Because the Federal Deposit Insurance Corporation ( FDIC ) or National Credit Union Association (NCUA) insures your funds, your cash is secure.
Here’s a pro tip: Keep your down payment in a separate account from your emergency fund or other savings. You might even choose to open an account at a different bank. That way, you won’t be tempted to use it for an emergency or for everyday spending.
The downside of using a savings account is the dismal return on your funds. The FDIC reports an average interest rate of just 0.06 percent for savings accounts in the U.S. as of August 2021.
High-Yield Savings Account
Weiss and Sprung both recommend using a high-yield savings account to store your down payment funds.
“High is relative and maybe the equivalent of 0.50 percent to 1.25 percent,” Sprung says. “It may be boring, but making sure the funds are there, all of them when you need it, will hopefully reduce some of the stress that is felt when buying a home.”
Money Market Account
You’ll have little to no risk if you stash your cash in a money market account. They’re almost always FDIC -insured, but make sure to confirm this before you deposit your funds.
A word of caution: Don’t confuse a money market account with money market funds. Money market funds are a type of mutual fund investment. While relatively low-risk, money market funds are not FDIC -insured.
A CD, or certificate of deposit, is similar to a savings account with one significant difference—you must commit to depositing your money for a specific period of time. If you withdraw the funds before the end of the term, you usually pay penalties.
It might pay a higher interest rate depending on the minimum deposit amount and how long you want to wait to buy a house. For example, in August 2021, the FDIC reported a meager 0.03 percent interest rate on a one-month CD, while a 36-month CD earned 0.21 percent.
If you can tolerate higher risk, you can invest your down payment in a brokerage account. Your account can let you put your cash in stocks and mutual funds that can potentially earn higher returns than a high-yield savings account or a CD.
But investments aren’t FDIC -insured, and the stock market can be volatile.
“Investing it in a brokerage account puts you at risk that you will have less money than you do now if your timing does not work out well,” Sprung says.