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It is important to keep your deposit funds in a safe place.
Key points
- A recent survey reveals that nearly a quarter of Americans are saving to buy a home this year.
- It is important to keep your down payment in a secure account where your principal is protected.
Buying a home is no small feat these days. With the general rise in residential real estate prices, buying a home in today’s market could easily mean having to take out a bigger mortgage and bring a larger down payment to the table.
But still, many Americans are determined to buy. In a recent CIT Bank survey23% said they were specifically saving for a home this year.
If you’re going down a similar path, you might be wondering where to keep the funds you’ve raised for your down payment. Here are some options to consider — and one option you’ll want to avoid.
The best place for your down payment
The money you save to buy a house is money you’ll need pretty quickly. Granted, you might not be ready to buy this year, but you might be ready next year or the year after. It is for this reason that you should not put your down payment in a brokerage account and invest it in hopes of growing it into a larger sum.
Investing always involves the risk of losing money. Now, if you’re buying stocks with the expectation of holding them for years and accumulating a lot of wealth for retirement, that’s a perfectly reasonable thing to do. Even if the stock market crashes, you’ll have plenty of time to ride out market pullbacks and come out on top (assuming, of course, retirement is many years away).
But when it comes to money you think you’ll need in a year or so, investing is a risky prospect and one you should avoid. If you have $40,000 for a down payment and want to buy a house at the end of the year, putting that money into stock now could mean your balance will drop to $35,000 over the next 11 months or so. You don’t want that.
The best place for your home down payment is really a savings account or a short-term CD. Although you won’t earn much interest on your money, you won’t risk losing any principal either.
Keep in mind that a savings account will ultimately give you the most flexibility. A CD, on the other hand, will require you to lock in your money for a pre-set period of time or risk losing several months of interest if you end up needing to cash out sooner.
If you can find a short-term CD (like a 6-month or 12-month CD) that has a considerably higher interest rate than what a savings account will pay you, then this option might work if it fits to your home buying schedule. But if the interest rate difference is really negligible, just save yourself the potential stress and stick to a regular savings account.
Don’t take risks with your down payment
Saving enough money to buy a home in today’s market isn’t easy. And as tempting as it may be to give your down payment a boost by investing it, it’s a risk not worth taking.
Even though today’s banks generally don’t pay much interest, your goal should be to find a safe place for your money until you’re ready to make an offer on a home and sign a loan. mortgage. Sticking to a savings account or CD is really the way to go.
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