Saving for a Down Payment: Where Should I Keep My Money?

Saving for a down payment is the first major step toward buying a home. It obviously requires discipline, to put aside the money. But it also requires some considerable thought as to the best place to park those funds. Whether to use a bank, an online bank, or the stock market to stash those tens of thousands of down-payment dollars depends on your timeline for becoming a homeowner.

Key Takeaways

  • Banks prefer borrowers who can pony up at least 20% a home's purchase price as a down payment.
  • Storing your funds in a savings account at the bank where you do your checking activity is probably the simplest and easiest choice.
  • If you want to earn more interest without sacrificing the safety of FDIC or NCUA insurance, opt for a high-yield savings account.
  • A brokerage investment account will generate more interest and return on your funds—but it carries greater risk, and you'll need to time your withdrawal based on the stock market.

How Much You'll Need to Save

When granting a mortgage, a bank or other lender requires a down payment to help reduce its risk in financing the remaining cost of the home. Banks prefer borrowers who can pony up at least a fifth of a home's purchase price. They typically won't lend you more than 80% of a residence's appraised value.

If you have excellent credit or qualify for certain loan programs, you may be able to secure a loan with less than 20% down, or even with no down payment at all. Keep in mind, though, that the programs that offer such generous terms usually require the borrower to pay private mortgage insurance (PMI) at an additional monthly cost.

Conversely, if you're deemed to be a high-risk borrower because of your credit history or other factors, the bank may seek a higher percentage of the home's value as a down payment before they'll grant the mortgage.

Of course, you're free to opt for a down payment of more than 20% of the home's value if you have the money available. The bigger the down payment, after all, the smaller the mortgage and the less onerous its monthly payments. (To calculate the numbers involved, you can use a loan amortization schedule.) 


Down Payment

Best Places to Keep Your Down Payment

The money for a down payment needs to be accessible easily and quickly, which all but rules out options like a long-term certificate of deposit (CD). It also should be in a form you can easily add to—from your paycheck, for example. Ideally, the funds should earn a return, while also remaining stable enough in value that they'll be sufficient to meet the down payment when the time comes. Finding the balance of risk, reward, flexibility, and timing that works for you is the key consideration as you choose among the options below.

Savings Account 

Storing your funds in a savings account at the bank or credit union where you do your checking is probably the simplest and easiest choice. As an existing customer, you can open a savings account quickly, and then readily transfer money to it from your checking account, either manually or through recurring transfers every payday.

The funds are secure since they're guaranteed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).  There is a downside to this option, though. That's a meager return on your funds since regular savings accounts come with very low interest rates.

High-Yield Savings Account

If you want to earn more interest without sacrificing the safety of FDIC or NCUA protection, opt for a high-yield savings account. Again, the simplest course would be to use your current bank. In fact, some financial institutions restrict these accounts to existing clients.

As their name suggests, high-yield savings accounts pay far higher interest than regular savings accounts, sometimes 10 to 20 times as much. However, the highest rates on these accounts are offered by online-only banks. If you can live with the absence of brick-and-mortar locations, one of these virtual institutions may be the best savings option of all.

That said, if you're not already an online banking customer you'll likely need to wait a little longer for transfers from your checking account than if you held the savings account at your own bank. And even the interest rates of online savings accounts are nothing to brag about compared with the potential earnings from other investment options.

First-Time Homebuyers Savings Account

Several U.S. states offer first-time homebuyers special rates and conditions to assist potential first-time homebuyers and incentivize home purchases. The perks vary by state, so check with the program before opening an account.

The states that offer these accounts, as of March 2022 are Alabama, Colorado, Iowa, Idaho, Michigan, Minnesota, Mississippi, Montana, Oregon, and Virginia. Additionally, a few states are considering allowing these sorts of accounts in the near future. These states are Maryland, Kansas, and Massachusetts. 

Brokerage Account

If you have an appetite for higher risk, you can opt to have your down payment fund accumulate in an investment account at a major brokerage. The account will allow you to invest the money in stocks and mutual funds that will potentially earn far higher returns than even a high-yield savings account.

However, given the volatility of the stock market, you may not realize those healthy returns as quickly as you need—or when you need them. So equity brokerage accounts, then, are best reserved for those whose timeline to buy a home is flexible and can afford to wait out any fluctuations in the market. As a rule, the stock market generally recovers from downturns over time, and funds held in stocks achieve healthier earnings in the long run.

If you're unsure about how to choose a broker you can check out this list of the best online stock brokers.

The Bottom Line

Given that you'll likely need tens of thousands of dollars for a down payment, it's wise to carefully research where best to hold that money, and choose the option that aligns with your needs and priorities.

If you want convenience above all else, you'll do perfectly well with a savings account at the brick-and-mortar bank you may already use. If you want a little more return and don’t mind waiting on transfers between banks, you can look to an online bank and earn more interest. If you can handle the risk, investment accounts offer the best returns. But they present the highest risk that the value of your down payment fund might drop just at the point when you need the money.

Article Sources
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  1. Consumer Financial Protection Bureau. "Determine Your Down Payment."

  2. Federal Deposit Insurance Corporation. "What's Covered."

  3. National Credit Union Administration. "Share Insurance Fund Overview."

  4. Consumer Financial Protection Bureau. "What is Private Mortgage Insurance?"

  5. Bodman. "Michigan Enacts First-Time Home Buyer Income Tax Provisions."