“Location. Location. Location.”
Real estate agents say when you’re searching for a new home, it can be one of the keys to success.
Location also can be a crucial consideration for homebuyers who are looking for just the right place to store their money for a down payment.
Where you decide to keep the money you save for a down payment can have an important role in your ability to reach your goal amount. And that means finding an account that has the right balance of security, growth, and accessibility to fit your desired timeline.
Tips for Determining a Timeline?
It starts with having some idea of how much you’ll need for the down payment and then estimating how long it will take to save it.
You may have heard that traditionally 20% was the must-have magic number for a down payment, but that amount isn’t by any means set in stone. According to Zillow ’s 2018 Consumer Housing Trends Report, more than half of the buyers surveyed (52%) put less than 20% down.
And younger buyers put down less than older buyers: 60% of millennials put down less than 20% compared with 48% of Gen Xers, 43% of baby boomers, and 38% of silent generation buyers.
Borrowers can find a range of down payment options based on the lender or type of loan they choose, as well as other factors.
A homebuyer might be looking to save anywhere from 3% down for a conventional loan or 3.5% of their expected home price (for the down payment on an FHA loan , for example) to more than 20% for unique properties or other eligibility scenarios.
For those who anticipate buying a home priced at $300,000 (the current median price in the U.S.), that could mean coming up with $10,500 … or more than $60,000. And it could take months or possibly several years to accumulate either amount depending upon circumstances.
Does Timeline have an Effect on Savings ‘Location’?
Depending on how long you may have to save, there are a few possible places to consider when you are ready to stash that down payment money.
Those who are looking at three years or fewer to save may want to focus on security and easy accessibility—getting the money in as conveniently as possible and, ultimately, getting the money out quickly when they need it.
Those who are looking at a longer timeline may wish to invest their money, even though it may mean immediate access can prove to be a bit more complicated.
While investing has it’s risk, those saving for a down payment over a longer time frame might find it a suitable option since there is some time to weather the fluctuation of the market. And those who find themselves somewhere in the middle may want to consider a little of both.
With those factors in mind, options for a shorter timeline may include:
Traditional Savings Account:
Storing money in a savings account at the brick-and-mortar bank where you do your checking (and, perhaps, other business) can be a convenient choice. You may have the choice to make deposits in person, online, or through automatic paycheck withdrawals.
And, because the funds are likely guaranteed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA) , it’s considered a safe option. But there’s a trade-off—because these types of accounts typically pay comparatively low interest , the money may not grow much while it’s sitting there.
Money Market Account:
A money market account (MMA) is considered another safe place to put down payment savings, and these accounts can also be insured by the FDIC or NCUA. Just as with a traditional savings account, there’s the convenience of being able to open the account at your local bank branch.
Money market accounts are similar to checking accounts in some ways, and may come with a debit card and or checks, but there’s typically a limit on transactions , and if that limit is exceeded, there may be a fee. An MMA usually will offer a higher interest rate than a traditional savings account, but the bank could require a higher minimum balance.
High-Yield Cash Management Account:
High-yield deposit accounts can offer a balance between safety and growth—with a dash of convenience thrown in for good measure.
The interest rates on these types of accounts are typically higher than a traditional savings account, especially with online institutions, which have lower overhead costs than brick-and-mortar banks and can pass those savings on to customers.
The money is accessible with a debit card (and sometimes checks), and some companies (including SoFi) charge no fees and have no minimum balance requirements.
Some online accounts also come with an app that allows users to link other accounts and track their spending and saving—a benefit that can be particularly useful when you’re working to accumulate a down payment for a home.
Signing up is usually easy, and saving can be, too, thanks to automatic deposits. And though online banking lacks the facetime with your favorite teller that a branch bank offers, customer service is generally still available.
If you have a longer timeline to save for your down payment—maybe five or more years—you could also consider these options:
Savers may look at investing in the market as a way to further grow their down payment money—but even with a diverse portfolio, it’s a risk. That’s because the value of investments tied to the markets—stocks, bonds, exchange-traded funds, mutual funds, etc.—can rise or fall on any given day.
If the market drops just as you’re ready to sell your holdings, you could lose money . Or you may have to push back your home purchase by months or even years until the account recovers. So market investing isn’t really built for short-term saving.
Taxes also could be an issue for those who hold investments outside of a tax-advantaged account. If your down payment savings timeline is longer, an alternative might be to open a Roth IRA specifically with home buying in mind.
Under certain special circumstances—including buying a first home—savers who have had a Roth for five years or more are allowed to withdraw up to $10,000 of their investment earnings with no tax or penalty.
But, it may be a good idea to consider other funding options before taking money from an IRA as it could set back retirement earnings, potentially by years.
It also may help to treat this down-payment-building investment account almost like a target-date fund, moving to safer investments as the time to make a home purchase draws nearer. Or you may wish to take a blended approach, investing a portion of your money in the market and putting the rest in a cash management account like SoFi Money®.
Certificate of Deposit:
From time to time, certificates of deposit are mentioned as a possible place to hold money for a home purchase—and like any other strategy, they have their pros and cons. CDs are considered “safe” investments because they’re insured by the FDIC.
They have a guaranteed interest rate, and investors won’t lose their principal unless they withdraw money from the account before the term is up.
But to get a competitive interest rate, an investor typically must sign up for a longer term. CDs offer different term lengths that can range from months to decades. And a CD owner usually can’t keep adding more money over time the way a savings account owner or market investor can.
Ready to Do Your ‘Home’ Work?
Buying a home can sometimes be a long, challenging process. It may take a sizable chunk of your income and your time. And the decisions you make at the start of the journey—even just finding the best account for mortgage savings—can possibly affect everything else down the road.
There are plenty of choices. If you’re looking for convenience and familiarity, a savings account at your local bank branch may do—but you’ll likely sacrifice growth.
If you shoot strictly for growth, you could risk losing the money you’ve worked hard to earn. With a cash management account like SoFi Money, you may be able to earn interest and grow your money without tying yourself to a long-term investment or market volatility.
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