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- If you’re saving for a down payment, a high-yield savings account is a good place to keep your money.
- That’s because you aren’t exposing your cash to risk when you don’t have the timeline to wait out any market dips, but it’s still growing.
- Many online banks offer over 2% interest on their high-yield savings, which is more than 200 times what you get from savings accounts at traditional banks that can pay as low as 0.01%.
I live in Southern California, where people need a huge down payment to buy a home.
But even if you live in a low-cost area, your savings plan should be the same. Taking advantage of the safety, interest rates, and separation of a high-yield savings account can be a big help.
Most home loans require a significant down payment to purchase a house, condo, or other real estate. While you may be able to buy with as little as 3.5% down using the FHA loan program, it’s best to put down 20% to avoid the added cost of private mortgage insurance.
No matter the size of your down payment, it’s important to pick the right bank account to protect and grow your money until you’re ready for the big purchase. If you don’t, you could delay your ability to buy a home without even realizing it.
Banks like Ally and Capital One are perfect for high-yield savings. Newer accounts like Marcus from Goldman Sachs are also worth a look. Whatever you do, don’t settle for 0.01% or put your money under the mattress. In the long-term, a high-yield savings account is typically best to save up a down payment.
Here are a few reasons a high-yield savings account is the best place to keep your down payment fund.
Funds are safe and secure
Over a long period of time, the S&P 500 typically offers an average 10% return on investment. But that 10% average is made up of a lot of ups and downs. For retirement savings, you may have decades ahead to ride out the ebbs and flows of the market. A home purchase, on the other hand, is likely to come a lot sooner.
If you put your cash in the stock market and it goes on a losing streak, you could lose part of your down payment and have to wait for the market to recover to buy a home. Recoveries can be slow, so you shouldn’t risk any money you are sure to need in the near future there.
Molly Stanifer, CFP®, financial advisor with Old Peak Finance, previously told Business Insider it’s not worth the risk to invest money you’d need in the shorter term. "Steer away from holding your money in something that would not be available when you may need it," she said. "It’s better to give up expected investment return to have the money available when you want to buy your house than to miss out because you invested too aggressively, or your money is not liquid."
Nearly all savings accounts in the US are insured by the FDIC or the NCUA. These government regulating bodies will make sure you get your money back even if the bank goes out of business. As long as your down payment fund is within the FDIC or NCUA coverage limits, there is virtually no safer place to store your down payment.
Earn a competitive rate
While savings accounts won’t give you the same returns as the stock market, you shouldn’t settle for a very low rate when better rates are available. Traditional bank savings accounts usually pay less than 0.10%, and can pay as little as 0.01%. You can do a lot better.
High-yield savings accounts typically come from online banks. If you can earn over 2%, your money will grow much faster than a low yield account. While a few dollars difference per month may not sound like much, it can easily add up to a hundred dollars or more per year in additional savings depending on the size of your fund. And as you add to your account over time, you’ll keep on getting a competitive rate on every dollar you save.
Many accounts share their rate in both APR (annual percentage rate) and APY (annual percentage yield) terms. APY includes the effects of compound interest, meaning it will always be higher than the APR, which doesn’t. When reviewing accounts, using the APY gives you the best apples-to-apples comparison.
Pretty much every bank offers online and mobile banking, but all banks don’t offer the same experience. In most cases, banks that offer high-yield savings accounts also give you the option to turn on automatic recurring transfers.
Remembering to move money from your checking to savings is tough. Even with calendar reminders, you may be tempted to spend the money on a YOLO experience rather than stash it away for a purchase that could be years away. Automating your savings means you can count on your account growing on whatever schedule you choose.
Bonus tip: Many employers allow you to split your direct deposit into multiple accounts. If you have that option, you can automate your savings every payday without ever seeing the money in your checking.
Avoid the temptation to spend
Some people try to use their checking account as a solution for all of their financial needs, but that is far from the case. Not only does this strategy lead to lower interest rates, but it also makes it more likely you will use the money for something else.
Restaurant visits, online shopping, and nights on the town are a lot more tempting when you have a big checking account balance. If you split out your savings, you force yourself onto a budget that will put you on track for a home.
If you are serious about buying a home and want to make it a top financial goal, the separation of a high-yield savings account, even one at a different bank, can be a big help.
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