Why You Should Open a High-Yield Savings Account for Your Down Payment Fund

published Mar 19, 2023
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If you want to buy a house sometime in the near future, you’re likely already starting to stash away funds to put toward a down payment. But where exactly should you be parking this money as you save up? Under the mattress? In a piggy bank? In the stock market? In your checking account?

Many financial experts recommend keeping your down payment fund in a high-yield savings account for safekeeping. These accounts are very similar to the savings account you likely already have at your local bank. The main difference is that they pay a much higher rate of interest, which means you can deposit money, sit back, and watch it grow without so much as lifting a finger.

To be clear: You won’t get rich overnight by simply putting money into a high-yield savings account and forgetting about it. But your money will grow faster in this type of account than if you were to deposit it into a regular savings account or, you know, keep it in your sock drawer.

With a traditional savings account, you may get between 0.20 and 0.35 percent in interest. With a high-yield savings account, that number may be closer to 3 or 4 percent.

“These accounts generally offer a yield of around 20 times higher than traditional accounts,” says Rick Arvielo, co-CEO of mortgage company New American Funding. “When you’re saving up for a down payment, every little bit matters. Putting your money into an account with a higher yield can make a big difference in the amount of time it takes you to save up that money.”

During the COVID-19 pandemic, many institutions began dropping the interest rates they offered to customers who had high-yield accounts — some even dipped below 1 percent. But now, those high-yield savings account interest rates have fully rebounded. In some instances, banks are offering even higher interest rates as the Federal Reserve — the country’s central bank — raises interest rates.

“In today’s high-rate environment, you can take advantage of high savings rates to earn maximum interest on your savings,” says Frank Newman, portfolio manager at Ally Bank.

In addition to offering a higher return on your investment, high-yield savings accounts are easy to set up and tend to be less risky than other types of investments, like stocks. They’re also insured by the Federal Deposit Insurance Corporation, just like a traditional savings account, which means your money is safe in case the bank fails. (That’s very unlikely to happen, but it’s still nice to have the peace of mind — after all, the FDIC does not insure money invested in other ways, including stocks, mutual funds, and annuities, to name a few.)

With a high-yield savings account, you can also withdraw your money at any time, which is handy when you need to move quickly during the homebuying process. This differs from some other types of savings vehicles, such as certificates of deposit, or CDs. Typically, banks require you to keep your money in a CD for a certain fixed period of time — from six months to several years. You may technically be able to withdraw your money at any time, but you may have to pay an early withdrawal penalty — such as several months’ worth of accrued interest — to do so.

Lenders also accept money withdrawn from a high-yield saving account for your down payment.

“High-yield savings accounts are a solid option for prospective homebuyers because you’ll have easy access to the money needed to put down when the time comes,” says Newman. “Other popular forms of payment, like credit cards or personal loans, aren’t accepted when it comes to making a down payment on a home.”

Though there aren’t any big drawbacks to saving your down payment in a high-yield savings account, there are some limitations and considerations to mull over. For one, they’re really best if you’re planning to buy a home within the next few years. If you’re operating on a longer timeframe, you may want to invest in something with an even higher rate of return, says Arvielo.

Also keep in mind that they’re typically only offered by credit unions or online-only banks, he adds.

If you don’t already have an online bank, it may take longer to set up an account. And if you prefer to do your banking in person, you may just be out of luck.

As you should always do when making financial moves, be sure to read the fine print to make note of any withdrawal limits or minimum deposit requirements, says Newman.

More broadly, as you’re stockpiling money for your down payment, remember that you may not need to save up quite as much as you think. You may be able to take advantage of down payment assistance or other types of financial assistance programs, especially if you’re a first-time buyer, says Arvielo. The amount can also vary widely depending on the type of loan and the lender you’re working with, he says.

Beyond that, it’s a myth that your down payment needs to be at least 20 percent of the purchase price. In reality, you may be able to put down as little as 3 percent, says Newman. You may need to pay private mortgage insurance every month, but making a smaller down payment helps you keep more cash on hand for any unexpected emergencies that crop up after you move in.

And speaking of those unexpected emergencies: It’s a good idea to continue setting aside money in a high-yield savings account, even after you’ve closed on the house, to help cover all the little — and big — costs that inevitably come with homeownership, says Newman.

“Using a high-yield savings account to tackle these costs is another great option when starting the homebuying journey,” he says.