Where Should You Keep Your Money When Saving for a Down Payment? (2024)

If you’re hoping to become a homeowner, the size of your down payment can make a big difference in your budget. The more money you pay upfront, the less you’ll need to borrow -- which translates to lower monthly payments and some major long-term savings in your overall costs.

Amassing that kind of cash may take some time. According to research from CNET’s sister site, Bankrate, one-third of aspiring homeowners believe they’ll need at least five years to save enough money to buy a home. If you’re beginning to set aside money for your down payment, the first piece of the puzzle is simple: Figure out the best place to put it.

Where to keep your down payment savings

High-yield savings account

Best option if you’re planning to buy a home relatively soon

If you’re thinking about buying a home in the near future, a high-yield savings account is the best place to store your savings. Your money will be protected by federal deposit insurance if the account is held at an FDIC-insured bank or NCUA-insured credit union. Plus, you can access your funds at a moment’s notice -- a key benefit if your dream house hits the market and you need to act fast.

The best high-yield savings accounts currently offer interest rates of 5% and above, which means your down payment fund will earn a sizable chunk of interest. For example, if you deposit $10,000 and earn 5% annual percentage yield (APY), you’ll have an additional $500 in one year (if interest is compounded annually). That can add to your down payment, or you can use it to cover some of the closing costs you’ll have to pay.

There is one downside to high-yield savings accounts: The rates are variable. If the Federal Reserve cuts rates this year (which seems very likely), savings rates will likely decrease, too. Additionally, easy accessibility to your money can be a drawback. You’ll need to resist the temptation to dip it into before you need it.

Certificate of deposit

Best option if you want to avoid tapping into your money

A certificate of deposit comes with a fixed interest rate, so you can calculate exactly how much interest you’ll earn. For example, if you deposit $10,000 in a three-year CD with a 4.75% APY, you’ll have $11,493.76 when it matures.

CDs also have early withdrawal penalties, which are often considered a disadvantage. However, if you’re saving for a down payment, a penalty can work in your favor by discouraging you from touching the cash before you’re ready to begin your home search.

The major drawback with a CD is that you probably won’t be able to add money after you open it. Most CDs require the full deposit upfront. So, if you plan to contribute to your down payment fund over a period of time, a CD isn’t the best fit for you.

Money market account

Best option if you want one account for saving and spending

A money market account works like a cross between a savings account and a checking account. You’ll likely get a debit card to use for spending, combined with an above-average saving rate. MMAs aren’t as common as savings accounts, but the best money market accounts are paying rates that compete with high-yield savings accounts.

The major risk with a money market account is the potential to mix up your everyday spending with your long-term savings goal. If you’re trying to save up thousands of dollars for a down payment, using the same account to cover your dinner out on Friday isn’t the best idea.

First-time homebuyer savings account

Best option if you’re looking for tax benefits

Depending on where you live, your state might offer a first-time homebuyer savings account program that can help you set aside money for your down payment and qualify for some tax deductions. In Oregon, for example, you can deduct up to $5,000 in deposits and interest per year ($10,000 if you’re filing jointly) for up to 10 years (or a total of $50,000). In Kansas, you can deduct up to $3,000 per year ($6,000 for joint filers) for up to a total of $24,000 ($48,000 for joint filers).

Depending on your state tax rate and your annual earnings, this may be a wise move to lower your tax obligations. Consult a tax professional to determine if this is the best route for your finances.

One note of caution: These accounts may pay significantly lower interest rates than high-yield savings accounts and CDs. You’ll need to do the math on your potential earnings (which are taxed in a high-yield savings account) versus the tax benefits to see which is better for your situation.

Individual Development Account (IDA)

Best option if you have a low income

If your income is low, buying a home might seem impossible. However, individual development accounts (IDAs) can help make homeownership a reality. These accounts offer funds to match your savings. For example, in Indiana, low- to moderate-income buyers can receive $3 for every $1 they save -- up to $4,500 in matching funds.

There are locally sponsored IDA programs across the country. To see if there’s one in your area and learn whether you meet the eligibility requirements, use the Prosperity Now map tool.

What’s the best place to keep your down payment fund?

As you compare options for places to store your down payment fund, ask yourself these questions:

How soon do you plan to buy a home? If you hope to start looking at homes in the next six to 12 months, you’ll want the liquidity of a high-yield savings account or a money market account.

How disciplined are you? If overspending has been an issue in the past, you may want to think about a CD to put an extra barrier between you and the money. An early withdrawal penalty can make you think twice about trying to access your cash.

How much interest will you earn? Deposit account rates can vary significantly from bank to bank. Shop around to find the highest APY possible.

Are there fees you need to worry about? Some savings accounts and money market accounts have monthly fees and/or minimum balance requirements that can chip away at your savings -- but many do not. You should avoid paying any unnecessary charges. Be sure to read the fine print to understand the account terms and conditions.

Don’t forget to save for closing costs, too

The down payment isn’t the only cost you need to cover when you buy a home. There are loads of other expenses -- lender fees, appraisal fees, taxes and more -- that you should factor into your budget. As you set a savings goal for your home purchase, remember to factor in all those closing costs.

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