Where Should You Save Your Down Payment Money?

A family of four in their new home unpacking boxes.

Saving for a down payment on a home takes time. And while you're building your savings, you've got many choices in terms of where to keep your money safe—some methods can even earn you some money over time. You might be eager to forge ahead, but it's a great idea to first take a second to devise a strategy.

How Much Do You Need to Save for a Down Payment?

While you may think of 20% as the standard down payment, the National Association of Realtors reports that first-time home buyers who get a mortgage typically finance 93% of their home purchase, which roughly means a 7% down payment. A 20% down payment may offer benefits—including the ability to forgo mortgage insurance—but it's not a requirement. Conventional mortgages can be had with as little as 3% down. Some government-backed loans, such as those offered through the Federal Housing Administration and the Department of Veterans Affairs, offer financing with low or no down payment.

You don't have to wait until you're ready to buy a home to explore how much house you can afford. Understanding how your income, credit, monthly expenses and down payment all work together can help you determine how much you'll need to save. Two dynamics to keep in mind:

  1. A larger down payment means a smaller mortgage. The more you pay upfront, the less you'll have to finance. That means less income to qualify for a loan and lower monthly payments.
  2. A smaller down payment can mean buying a home sooner. If you handle a larger mortgage and bigger monthly payment, saving less will save you time. On a $350,000 home, the difference between a 3% down payment and a 20% down payment is $59,500, so it's plain to see why a smaller down payment can trim years off your home purchasing timeline.

Best Places to Put Your Down Payment Savings

While you're building up your savings, a dedicated savings account makes it easier to track your progress—and avoid using the money to cover your living expenses. Though interest rates are notably low as of early 2021, one of the safest places to park your cash is at a bank or credit union, where funds are insured up to $250,000 per account by the Federal Deposit Insurance Corporation or National Credit Union Administration and won't fluctuate with the market.

Here are a few options to consider:

  • A high-yield savings account works like a regular savings account, but with a higher interest rate. Online banks are often a good place to look for these accounts. In addition to shopping for rates, make sure the account you're considering doesn't have monthly fees attached.
  • Money market accounts also let you earn while saving and may come with a debit card to use for limited transactions. Money market interest rates are competitive, but be mindful of minimum balance requirements.
  • Certificates of deposit (CDs) or share certificates may offer slightly higher rates, but timing can be an issue. CDs require you to keep your money in your account for a set period of time—say, three months or five years—with penalties for early withdrawals. If these restrictions work for you, CDs are a fine place to stash your money.

Trading Risk for Reward With Investments

Even the best high-yield accounts offer meager gains. That can make the idea of investing seem attractive: What if you could make real gains and earn dividends on your money?

The problem with investing is risk. Savings accounts may not earn you a fortune, but they are safe, insured and surprise-free. With investments, the gains can be higher but the losses can be devastating. One hedge against this kind of risk is time. If you expect to save your down payment over 10 years, for example, fluctuations in the stock market may be less concerning. If past market trends are any indication, your money is likely to grow over that period of time. But if you're targeting a three- to five-year homebuying goal, be cautious.

  • Consider investing a small portion of your savings to start. You'll put less money at risk.
  • Check out lower-risk investments. These methods, such as money market funds or Series I savings bonds, can grow your savings with little risk.
  • Learn everything you can about investing. A financial advisor or even a robo-advisor may help.

Save More for Your Down Payment

Interest and earnings are great, but the fastest way to grow your down payment is by contributing more money. Here are a few ideas for maximizing your savings:

  • Budget, budget, budget. Avoid overspending and be systematic about saving. Fine-tune your budget periodically to find additional ways to save.
  • Use automatic savings or a savings app. By "rounding up" your transactions and squirreling the change into savings or otherwise gamifying the process, your bank's mobile app or a dedicated app like Qapital or Digit can help you tuck away a few extra dollars painlessly.
  • Look for ways to generate additional income, then funnel your earnings into savings. This may mean getting another job or looking for ways to generate passive income.
  • Throw in your tax refund, work bonuses and other windfalls. It all adds up.

Get Your Credit Ready for a Mortgage

Having good credit is almost as good as money in the bank when you're shopping for a mortgage. Lending requirements are often strict, and the best interest rates and features generally go to consumers with the highest credit scores. If you're aiming for a lower down payment, your good credit is also a signal to lenders that you're a lower-risk borrower.

How do you get your credit ready for a mortgage? Start by checking your credit. Knowing your credit scores and understanding what's in your credit report can help you to know what types of loans you qualify for. It also gives you an opportunity to take action to improve your credit if necessary. Better still, free credit monitoring from Experian helps you keep track of your credit score and report continuously. You can also set alerts that let you know when your credit score or report have been updated.

To keep your credit in optimal shape, keep these good credit habits in mind:

  • Pay all your bills on time.
  • Pay down debt as much as possible.
  • Don't apply for loans or credit for at least several months leading up to your mortgage application.

No Place Like Home

While no savings account or investment option can make saving for a down payment effortless, ensuring that your money accumulates safely can help keep you on track. Once you reach your savings goal, the value of owning your home is incalculable.