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All potential homeowners face the same conundrum when it comes to the down payment for their potential new home: The money needs to be quickly accessible during the home buying process, but by keeping that money in cash, you lose out on the potential returns from less liquid investments like stocks or property. So where should you stash your down payment so you don’t sacrifice the upside? Here’s a look at your options.
When it comes to down payments, liquidity is king
If you’re planning to buy a house within a year, financial advisors commonly advise that you keep your down payment savings in a low-risk cash account of some kind. This is for two reasons:
Liquidity: You need to be able to withdraw the sum very quickly when home buying (sometimes in a matter of hours). Risk exposure: You could risk losing a large chunk of that money if it’s tied up in riskier investments like the stock market.G/O Media may get a commission
As Molly Stanifer, a financial adviser with Old Peak Finance explains to Insider: “It’s better to give up expected investment return to have the money available when you want to buy your house than to miss out because you invested too aggressively, or your money is not liquid.”
Unfortunately, that means giving up an average annual return of 10% on the stock market for something closer to 0.5% with savings accounts. That doesn’t mean you couldn’t keep that money in a brokerage account if you wanted to, but you wouldn’t be able to withdraw that money as quickly as cash, and you’d be exposing yourself to increased stock market volatility in the short-term. (For example, the S&P dropped 34% in value in just over a month at the beginning of the pandemic).
Places to put your money
The safest place to put your money is in a cash account. In terms of interest rates, they’re all about the same, however: not generous.
High-yield savings accounts: Most people are already familiar with savings accounts, making them the easiest place to store your down payment. The interest rates aren’t great—around 0.5%—but they’re typically better than what regular checking accounts offer and the money is still easy to withdraw.Money market accounts: These are like hybrid checking/savings accounts, although you’re allowed only a few transactions each month (which isn’t a big deal if the money is meant for one big transaction like buying a home). These accounts can offer APYs closer to 0.6%, which is comparable to a high-yield savings account. First-Time Homebuyers Savings Account: Some states offer savings accounts with slightly higher interest rates and special tax advantages that vary by state. Currently Alabama, Colorado, Iowa, Idaho, Minnesota, Mississippi, Montana, Oregon, and Virginia offer these programs. Click here for more information.Aside from the cash accounts described above, low-risk, liquid options are rather limited. Timing is a big factor, too. Again, you could still invest your money in stocks or mutual funds through a brokerage account, but advisors typically only suggest this if you’re willing to accept the risk, and are a few years away from buying a house—not actively buying.
What to do if you are waiting for the market to crash
As the Wall Street Journal reports, some homebuyers are in limbo, however, as they’re willing to wait 12-18 months for house prices to drop. In that case, some of them have adopted a hybrid approach that invests a portion of their down payment while keeping the rest in savings. The other option, of course, is to simply pack it in and reinvest that money until the market is more favorable. Whatever you choose, consider working with a financial advisor to assess your risk tolerance first so they can walk you through your options.
Bottom line
Since timing and liquidity are an important part of the home buying process, you’ll likely need to sacrifice growth for safety when it comes to your down payment on a new home. If you plan to buy a home in the next few months, financial advisors typically recommend putting your down payment into a cash account that offers the highest interest rate possible. If you have more time, you have a lot more flexibility.
