Saving for a down payment on a house may be one of your most important financial goals. You need to protect that money so it will be available when you’re ready to buy a home.
Why You Should Keep Down Payment Funds in a Separate Account
Money for a down payment should be kept apart from your other funds. One reason is to help you resist the temptation to spend it on something it’s not intended for. If down payment money is in an account specifically designated for that purpose, it will be easier to keep yourself from dipping into it to cover other things.
Another reason to have a separate account is to monitor your progress. If you mix down payment money with your emergency fund or money you’re saving for a vacation, it will be difficult to keep track of how much you have saved for each purpose. Separate accounts will make recordkeeping easier and help you see if you’re meeting your goals.
Why You Shouldn’t Invest Down Payment Money
If you aren’t planning to buy a house for several years, you may be thinking about investing money you’re saving to make it grow faster. That can be a risky strategy.
Investing in the stock market makes sense when working toward long-term goals, such as retirement. The market goes up and down, but it generally goes up over a long period of time. If the market falters and you won’t need to withdraw money for decades, you will most likely come out ahead in the end.
When it comes to saving for a house, your timeframe is likely much shorter. If you plan to buy a house in the next five years and the stock market goes down, it may not rebound before you’re ready to buy a house. You may have to make a smaller down payment than you would like or delay a home purchase.
Keep Your Money Safe
A high-yield savings account offers an interest rate higher than that of a typical savings account, plus funds are protected by the federal government. Online savings accounts generally offer higher rates than brick-and-mortar institutions.
A money market account offers a higher interest rate than you might earn on another type of account, as well as the ability to make ATM withdrawals and electronic transfers, write checks and make purchases using a debit card. Some money market accounts require a minimum deposit to open an account, as well as a minimum balance. Some also charge monthly fees.
Certificates of deposit pay interest. If you buy CDs, you will have to keep your money in them for a specific period of time. The longer the term, the higher the interest rate you will earn. If you withdraw funds early, you may have to pay a penalty.
Several states offer first-time homebuyer savings accounts. They offer tax advantages and help people save money for a down payment and closing costs. Specifics vary by state.
