All potential homeowners face the same conundrum when it comes to the down payment for their potential new home: Money needs to be readily available during the home buying process, but by keeping that money in cash, you lose potential returns from less liquid investments like stocks or property. So where should you put your down payment so you don’t have to sacrifice the hike? Here is an overview of your options.
When it comes to down payments, liquidity is king
If you plan to buy a home within a year, financial advisors usually advise you to keep your down payment savings in a low-risk cash account. This is for two reasons:
- Liquidity: You have to be able to withdraw the sum very quickly when buying a home (sometimes in a few hours).
- Exposure to risk: You could risk losing a lot of this money if it is tied to riskier investments like the stock market.
Like Molly Stanifer, financial advisor at Old Peak Finance explains to Insider: “It is better to give up the expected return on investment to have the money available when you want to buy your home than to miss it because you have invested too aggressively or your money is not liquid.
Unfortunately, that means giving up a 10% average annual return on the stock market for something closer to 0.5% with savings accounts. That’s not to say that you couldn’t keep that money in a brokerage account if you wanted to, but you couldn’t withdraw that money as quickly as cash, and you would expose yourself to increased volatility in the stock markets. in the short term. (For example, the S&P fell 34% in value in just over a month at the start of the pandemic).
Places to put your money
The safest place to put your money is in a cash account. In terms of interest rates, they’re all pretty much the same, though: not generous.
- High yield savings accounts: Most people are already familiar with savings accounts, which makes them the easiest place to store your down payment. Interest rates are not great – around 0.5%– but they are generally better than those offered by checking accounts and the money is always easy to withdraw.
- Money market accounts: These are like hybrid checking / savings accounts, although you are only allowed a few transactions per month (which is okay if the money is for a single big transaction like buying money). ‘a house). These accounts may offer APYs closer to 0.6%, which is comparable to a high yield savings account.
- First-time home ownership savings account: Some states offer savings accounts with slightly higher interest rates and special tax benefits that vary from state to state. Currently, Alabama, Colorado, Iowa, Idaho, Minnesota, Mississippi, Montana, Oregon and Virginia offer these programs. Click here for more information.
Apart from the cash accounts described above, the low risk liquid options are rather limited. Timing is also an important factor. Again, you can still invest your money in stocks or mutual funds through a brokerage account, but advisers usually only suggest this if you are willing to accept the risk and are a few years away from it. buying a house, not actively buying.
What to do if you wait for the market to collapse
As reported by the Wall Street Journal, some homebuyers are in limbo, however, as they are prepared to wait 12 to 18 months for home prices to drop. In this case, some of them have taken a hybrid approach that invests part of their down payment while keeping the rest in savings. The other option, of course, is to simply wrap it up and reinvest that money until the market is more favorable. Regardless of your choice, consider working with a financial advisor to assess your tolerance for risk first so they can explain your options to you.
At the end of the line
Since timing and liquidity are an important part of the home buying process, you’ll likely have to sacrifice growth for security when it comes to your down payment on a new home. If you plan to buy a home in the next few months, financial advisors generally recommend putting your down payment into a cash account that offers the highest possible interest rate. If you have more time, you have a lot more flexibility.