Saving Your Down Payment in a CD Account Could Make You Thousands (with a Catch)

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When someone finally decides to buy their first home, actually walking through the front door is years away. From saving for a down payment to winning bidding wars, the process takes time. Even still, it’s never too early to start (or continue) saving for a down payment.

But where can you store your hard-earned funds and earn the most bang for your buck before making a withdrawal? The answer depends on a number of factors. Certificates of deposit (CD) accounts, for example, could be a way to make thousands more on your initial investment, but there is a catch — you can’t pull out the money before your interest term is up without facing a penalty. 

So is it a good idea? Here’s what several financial experts had to say.

Why (and When!) Saving for Your Down Payment in a CD Is a Good Idea

If you’re less than three years away from purchasing a home, then your savings should be kept in a high yield savings account, CD, or treasuries — all of which are safe investment options that have low risk, says Kendall Meade, certified financial planner at SoFi. 

She adds that one of the advantages of a CD is that you’ll have a fixed interest rate, while high yield savings accounts can have variable rates that change periodically when the Federal Reserve changes rates. 

As rates have been rising, yields on CDs have gone up, making them more appealing, says Kimberly Palmer, personal finance expert at NerdWallet. “The main downside to consider is that when you put your money into a CD, it is locked up for the term of the CD — that could be for six months, five years, or longer,” she explains. “You only want to put money into a CD to capture that higher yield if you don’t need the money for the duration of the term, because if you withdraw a CD early, then you pay a penalty.” 

An approach to CDs that provides more flexibility is called laddering. That means dividing your savings up into a few CDs with different term lengths. “As each CD matures every few months, you can either use the money or reinvest it in a new 12-month CD to keep the ladder going,” says Geri Hopkins, chief operations officer at Skyla Federal Credit Union. “This gives you flexibility and a steady flow of savings.”

The Downside to Investing in a CD

Jen Reid, financial planner and founder of Base Financial Planning, says that locking up your money in a CD doesn’t feel worth it at the moment. “High interest savings accounts are offering such competitive rates right now for savings,” she says. “For example, even if you have $100,000 saved for a down payment, the difference between 4.75% interest on a high yield saving account versus 5.5% on a CD is really only $750 over the year.” 

Meade agrees, adding that the downside to investing in a CD is that if you find your dream home before the CD period is up, you will have to take the money out early and pay that penalty — or potentially skip out on your dream home. The cost of these penalties range among financial institutions, but generally are between 90 days and 18 months’ interest on your account.

If your timeline for buying a house is more than three years, Reid recommends looking at investing a portion of the money you’ve saved in mutual funds instead. And if you’re unsure of your timeline, Palmer says you might consider a high yield savings account for safekeeping your funds while still having them accessible in case of emergency.

The Bottom Line

Before finalizing any savings plan, certified financial planner Ross Loehr at The Sovereign Investor encourages first-time homebuyers to consult with a financial advisor to ensure it aligns with your financial goals and timeline. “They can help you tailor a strategy that maximizes returns while maintaining the flexibility needed for your down payment goal,” he says.