Saving money for a down payment can seem like a tough job. Before you go hiding it under your mattress, you should think twice, though. You’ll want to save that money somewhere that your future lender can track it. They need to know its origination and from under your mattress isn’t an option. You need ‘seasoned’ funds. In other words, money that sat in your account for at least 2 months, sometimes longer.
So which bank accounts are the best place for your funds? Keep reading to learn what you should consider.
Keep the Risk Low
It might be tempting to throw your money into the hottest investment. You think you can double or triple your money, so why not?
There’s one reason – you don’t want to put your capital at risk. You need this money to purchase the home you want. If you don’t have the capital, you won’t have a loan. We don’t advise you to put the money in anything but an FDIC insured vehicle. Don’t worry, this doesn’t mean you’ll only earn pennies on the dollar with your local bank’s savings account. There are other options as well.
Checking and Savings Accounts
If you aren’t averse to keeping your money in a low interest checking or savings account, it’s honestly the safest place for your funds. You can find high-yield interest accounts online if you want to push the limits with the interest you earn.
The benefit of keeping your money in checking or savings is its liquidity. You can get to it at a moment’s notice. As long as you don’t have more than $250,000, your money is covered by FDIC. In other words, if you go to withdraw your funds and the bank cannot oblige, the FDIC will reimburse you the funds.
Money Market Account
Don’t confuse the money market account with money market funds you’d buy on the open market. The money market account is a high-yield savings account. Generally, you can open this type of account at your local bank and receive a much higher interest rate on your money. However, the tradeoff is that you typically have to open the account with a much higher balance and you must keep that balance throughout the life of the account.
This is a good option for borrowers that already started saving a significant amount of money for their down payment and want to put their money to work for them.
If you are not buying your home for a while, you can tie your funds up in a CD. Make sure you understand that you cannot access the funds until the CD matures. You can get CDs for as little as 6 months and as long as several years. The longer the maturity date, the higher the interest. But again, you have to be able to be without those funds for that time.
Before you choose the CD, make sure you know your timeline well. If you are starting to shop for a home, but haven’t’ found one yet, using the CD probably isn’t the best option. You could find a home quickly and have a seller that wants to close in 30 days.
Instead, this option is best for those that are a year or two away from shopping for a home. You can gain the little bit of interest the CD will pay you while you continue to save for your down payment.
Another option if you have time before you need the down payment is treasury bonds. This is the safest investment on the market, but it requires you to tie up your money for a while. You’ll pay a discounted rate for the face value of a bond. For example, a $1,000 bond may sell for $980. At maturity, you would get the face value or $1,000 for the bond.
The bonds are sold in many increments and different maturity dates. This is one investment that you can sell before maturity and not get penalized. However, you won’t realize the full face value of the bond. You’ll only get the amount the bond is selling for on the market at the time.
No matter how you store your money for the down payment, make sure it’s in a reputable account that the lender can track. The lender will ask for at least 2 months’ worth of your bank statements to ensure that you’ve had the money you plan to use for the house. Showing up with cash is not an option. The lender has no way to track where the money came from – it could be your own money or it could be a loan from someone. The lender cannot accept this risk.
Choosing the savings vehicle that is safe for you and gives you the liquidity you need is important. Think of your long-term plans before tying up your money. If you are unsure, stick with the checking or savings account for safekeeping.