3 Places to Keep Your Down Payment Savings (And How to Choose the Right Account for You)

Key points

• Don’t invest your down payment if you plan on buying in the next five years.
• Choose the best house savings account: the one that’s designed to help you reach your goal.
• Automate your savings as much as possible and watch your stockpile of cash grow faster.

Setting up a dedicated account for your house savings fund is one of the best ways to track progress towards your goal. When you have all your savings in one big bucket, it’s hard to know how much headway you’re making one pay period after another.

Another bonus? A dedicated place for your house fund outside of your normal checking account and emergency fund may make you less likely to spend it.

But what kind of account should you choose?

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Should you invest your down payment money?

Renters everywhere are in the same predicament as you. You’re working hard to save thousands of dollars, but you don’t like the thought of that money just sitting in a basic savings account.

Keeping it in cash means you’re losing out on potential investment returns. At the same time, you need the money easily accessible for your upcoming home purchase.

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Here’s a rule of thumb to follow: if you’re going to need your cash for a major purchase in the next five years, don’t invest it. The stock market can help you build wealth and make your money work for you, but only if it’s parked there long enough to recover from any downturns. 

In January 2022, tech stocks fell almost 10% from a record November in 2021. Bitcoin has suffered even worse losses, dropping 40% since its all-time high in November.

It’s not to say you shouldn’t invest. In fact, prior to these recent dips, both the stock market and cryptocurrency have seen significant gains through the pandemic. But if you started investing your down payment savings in the fall and you’re aiming to buy a house this summer, the past few months would have been disastrous for your finances.

Don’t forget: any market gains are taxed, so what you’re able to use for your down payment isn’t directly reflected in the market highs.

Putting your money to work by getting into a home sooner is the best way to build wealth. Owning a home means as real estate values go up, so does your personal net worth.

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3 types of house savings accounts to consider

If not the stock market or your crypto wallet, where should your house savings go? Here are three options that go beyond a traditional savings account:

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1. High-Yield Savings Account

High-yield savings accounts work just like regular savings accounts, with one key difference: the interest rates are a lot higher than the national average.

A regular savings account typically pays about 0.06% in annual interest. For every $1,000 you save, after 12 months you’ll have earned 60 cents in interest.

A high-yield savings account may earn about 0.50% in annual interest. In this case, for every $1,000 saved, you’ll have earned about $5 after 12 months.

Opening a high-yield savings account is the same process as opening a regular account. You start by finding the bank that’s right for you. For the most part, online banks offer the best interest rates. They don’t check your credit score, but you’ll need to provide your social security number to open the account and make an initial deposit.

One of the benefits to opening a high-yield savings account is it’s FDIC-insured. That means no matter what happens to your bank, your money is safe, typically up to $250,000.

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2. First-Time Homebuyer Savings Account

Depending on which state you live in, you could be eligible for a first-time homebuyer savings account (FHSA). These accounts help you save for a home on a tax-advantaged basis, and are designed for people who need support saving for their first home, whether due to high student loan payments, skyrocketing rent costs, and more.

However, the only requirement to sign up is being a first-time homebuyer as defined by your state. The states that currently offer FHSAs are:

• Alabama
• Colorado
• Idaho
• Iowa
• Minnesota
• Mississippi
• Montana
• Oregon
• Virginia

Massachusetts, Maryland, and Kansas are currently reviewing legislation to make FHSAs possible.

The main benefit to these accounts is the interest earnings grow tax-free, and you may get a state tax deduction for your contributions depending on the laws in your location.

But keep in mind you have to use the account to pay for fees directly related to the purchase of your first home, including a down payment, closing costs, and any other approved expenses. If you withdraw and spend for another purpose, you may have to pay a fee up to 10%.

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How do you open an FHSA?
This is the simple part. You can either open a new savings account as your FHSA, or designate an existing savings account as your FHSA. All you need to do is declare your account as an FHSA at tax time by filing a form.

Make sure you research the guidelines in your specific state. States like Oregon require that the FHSA-designated account is with a local bank or credit union.

3. Money Market Account

A money market account is a bank account that earns you more interest than the average savings account, but not by much. The only difference is your bank takes the money and invests it into the financial markets.

The benefit to a money market account is you can access the money through an ATM and you can also write checks, unlike savings accounts.

One of the drawbacks is money market accounts have high minimum balance requirements, and you need a large chunk of change for your initial deposit. You’re also limited to the number of transactions you can make each month without incurring a fee. Money market accounts are not FDIC-insured. It’s a riskier place to store your down payment cash.

A money market account is a good option for stashing your savings for a near-term goal if you still want to be able to access the money easily and earn more interest than average.

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How to choose the right house savings account

When you’re choosing the ideal account for your house fund, here are the factors to consider:

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Analyze the interest rate

Even the highest interest rates on savings accounts aren’t going to significantly grow your account balance. Still, take a look at the interest rate the account offers because it’s money you earn without lifting a finger, and it does add up over time. Your house savings account should give you more in interest than your regular savings account.

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Ask about rewards

Many banks offer incentives for signing up and opening an account. Research the benefits you’ll get from becoming a customer.

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Judge its capabilities

The best savings accounts are designed to make the savings part easy. For example, you should assess whether the account you’ll use allows you to automate deposits. If you’re saving with someone else, maybe you want to automate deposits from each of your accounts. Surprisingly, some banks limit this.

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Read the fine print

Does the savings account require a minimum initial deposit? What about minimum balances? If you have to transfer some money out for any reason, the last thing you want is to get hit with a fee because you’re not meeting the minimum balance requirements.

FDIC insurance matters, because it means your money is protected. Steer away from any accounts that don’t guarantee the safety of your hard-earned money.

Do they limit deposits and withdrawals? What about fees? Are the interest earning promises legit? Some of the fine print for high interest savings accounts includes requirements that make it hard to actually earn the interest amounts advertised.