When it comes to owning a home, the first major step is saving for a down payment. This requires not just financial discipline but also strategic thought about where to store those funds─ a regular savings account, a high-yield savings account, or an investment account? The decision largely depends on your plans and timeline for becoming a homeowner.
For a mortgage, banks and lenders ask for a down payment to offset their risk in financing the home's remaining cost. They prefer borrowers who can afford at least 20% of the property's value as a down payment, not lending more than 80% of the appraised property value.
If your credit is excellent or you qualify for certain loan programs, you might secure a loan with less than 20% down, or even none at all. However, loans offering these generous terms usually involve the borrower paying private mortgage insurance (PMI) as an extra monthly cost. Furthermore, if your credit history deems you a high-risk borrower, a bank may seek a greater percentage of the home's value as a down payment before granting the mortgage.
You could choose to have a down payment of over 20% if your finances permit. The larger the down payment, the lesser the mortgage and monthly payments.
The funds earmarked for your down payment should be easily accessible, eliminating options like long-term certificate of deposit (CD). Also, it should be a form you can regularly add to, and ideally earn a return while maintaining stability in value to serve the purpose when the time comes.
The most straightforward option for storing your funds is a savings account at your primary bank or credit union. As an existing customer, you can swiftly open a savings account and transfer money to it from your checking account. The funds are safe, being guaranteed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). The downside is the low return, given the low interest rates typical of regular savings accounts.
For more interest, without sacrificing FDIC or NCUA safety, you could opt for a high-yield savings account. High-yield savings accounts offer significantly higher interest than regular savings accounts, with online-only banks offering the highest rates. Yet, being an online banking customer might mean waiting longer for transfers from your checking account.
Various U.S. states provide first-time homebuyers with special rates and conditions to promote homeownership. The benefits depend on the state, so research your state's offerings. States with such accounts as of April 2023 include Alabama, Colorado, Iowa, Idaho, Kansas, Maryland, Michigan, Minnesota, Mississippi, Montana, Oregon, and Virginia.
For those willing to accept higher risk, an investment account at a prime brokerage is an option. This allows your down payment to accrue potentially far higher returns than a high-yield savings account. This, however, is subject to market volatility, so it's best suited for those with flexible home-buying timelines who can handle market fluctuations.
Ultimately, the fastest avenue to a house down payment is ensuring your savings are earning a return. An FDIC-insured, high-yield savings account means you'll earn interest while safeguarding your capital. Meanwhile, investing your savings in the market through a brokerage account gives faster returns but carries more risk.
From convenience to risk level and returns, the best place for your down payment funds depends on your needs and objectives. While an investment account offers potentially the highest returns, it commits your funds to the highest risk. On the safer side is an FDIC-insured high-yield savings account, especially those available online, providing a better yield-risk balance. Then there is the regular savings account in your local bank for simplicity and convenience, even with less interest.