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The post Where to Save Money for a House appeared first on Millennial Money.
Buying a house is one of the most expensive undertakings in a person’s life. So it pays to have plenty stashed away in savings before house hunting!
But where’s the best place to safely save and grow the money you’re saving? Let’s find out.
Where to Put Your House Savings
Here are the best places to put your money when saving for a house.
1. High yield savings account (HYSA)
For most people, high yield savings accounts (HYSAs) at online banks are the safest place to grow your down payment for two primary reasons.
First, HYSAs provide some small growth, thanks to interest-earning on deposits, which is called annual percentage yield (APY).
Secondly, your HYSA deposits are secure and not subject to market volatility. Your APY rate may change slightly due to interest rate adjustments by the Fed. However, you’ll never lose money unless you take it out yourself and spend it.
As for how much you can earn, here are some examples at the time of writing:
- Axos Bank’s HYSA pays 0.61% APY
- Ally Bank’s Online Savings APY is 0.50%
- American Express National Bank’s APY is 0.40%
In comparison, a traditional savings account from Bank of America offers a measly return of… 0.01% APY.
Another benefit to HYSAs is that you have some (but not too much) ability to move money around. That’s because HYSAs are bound by Regulation D, a federal restriction that limits the number of transactions per billing cycle consumers are allowed to make with a savings account. Typically, you’re allowed to make six withdrawals and transfers from your HYSA each month.
Simply put, this makes it harder to spend your money and easier to save it.
Learn More: Check out our top HYSA recommendations.
2. Certificates of deposit (CDs)
CDs can also be a great place to stash money, depending on how far you are from making a purchase.
If you’re a year or two away from buying a home, you may want to lock a sum of money away in a CD with a fixed interest rate for one to two years.
Just make sure you don’t need to access that money during the term or you’ll have to pay an early withdrawal penalty.
Learn More:
3. Money market accounts
Money market accounts are similar to checking accounts because they come with flexible debit card access.
The major difference is that money market accounts generate interest rates based on money markets. As a result, they tend to pay much higher interest on deposits than traditional checking or savings accounts, and are more in line with what you’ll find with an HYSA.
One strategy is to link money market accounts to HYSAs and use them when withdrawing funds. You may withdraw $20,000 from a HYSA for a down payment and keep the money on hand in a high-interest money market account as you approach the closing date, enabling you to still earn interest.
Learn More:
4. Brokerage accounts
If you’re considering buying a house within the next 5 to 10 years, then it could make sense to put money into a robo-advisor or taxable brokerage account. This way, it can grow in the stock market.
Keep in mind that investing in brokerage accounts can be risky due to market volatility. So, you should only do this if you already have a sizable amount saved in a savings account. You’ll also have to pay taxes on any gains you cash out on
If you play your cards right, you’re likely to generate more than you would with a savings account, giving you more wiggle room when shopping for a mortgage loan and house.
Learn More: Check out my top picks for online brokerage accounts.
Where to Avoid Putting Money When Saving for a House
Here are places to avoid putting your money before making a home purchase.
1. Low-interest checking accounts
New homebuyers often make the mistake of keeping money in traditional checking accounts as they save up a down payment.
This creates a few problems. For starters, interest rates are so low that your deposits will produce little to no income. But the worst part is that it’s much easier to spend money when it’s in your checking account.
Maybe you face an unexpected car repair or dental bill. These situations can quickly deplete your savings by a few thousand dollars, leaving less to put towards a deposit, down payment, or closing costs.
When you’re saving for your first home, every penny counts.
2. Tax-friendly retirement accounts
There’s nothing wrong with putting money aside for retirement while you’re saving for a house. However, you should be prepared to kiss that IRA or 401k money goodbye for at least a few decades.
Any money you put into retirement savings is considered illiquid cash, meaning you can’t easily access it. When you’re buying a home, you’ll want to have access to liquid cash so you can quickly come up with your down payment and closing costs when the time comes.
That said, overall best practices suggest having several lines of investing.
- Retirement savings, which you won’t touch until retirement, but you can if you absolutely need to.
- Brokerage accounts you can pull money out of when needed, but expect to pay taxes on gains.
- Savings accounts, where you can safely grow deposits. This is the best place to store your house money.
3. Alternative investments
The same logic applies here as well. It’s okay to invest in alternative investments, but not with your down payment savings.
Alternative investments can be anything from fine art to classic cars to cryptocurrencies. These can potentially have value but are illiquid assets, meaning they can be tricky to sell for a profit.
The only area where alternative investments could make sense is through other real estate investments (but that’s also risky).
If you own a cash-generating rental property or real estate investment trust (REIT), you could make some decent returns from those investments. Or, you may choose to flip a home before you buy your next one.
Why You Need to Focus on Saving Money
Here’s why you need to save as much as possible when buying a house.
Closing costs can be exorbitant
Expect to put anywhere from 2% to 5% down when buying a house. Closing costs can account for a variety of expenses like property taxes, inspections and appraisals, and private mortgage insurance, to name just a few.
Some banks allow homebuyers to roll closing costs into monthly mortgage payments. This drives up the cost of the home loan, however, costing more out of pocket in the long run.
Learn More:
You may be able to avoid PMI
Lenders request private mortgage insurance (PMI) from borrowers they deem to be high risk. PMI is usually applied when putting less than 20% down.
Putting 20% or more down on a property can help you avoid PMI, while also driving the principal down. So, if you’re a good saver and can afford to put down 20%, it’s generally a good idea because it can save you tons of money over time.
Learn More:
Avoid taking out loans or using credit cards
First-time homebuyers often put so much into closing on a house that they neglect to consider any additional expenses that may occur after closing.
For example, houses need to be furnished and in some cases remodeled. They may need landscaping and HVAC or electrical repairs. There are also relocation costs to consider on top of any other regular monthly payments like your student loan and groceries.
The general rule is to have $10,000 to $20,000 on hand to cover additional expenses when you buy a house to cover any further costs that arise.
Frequently Asked Questions
Is it hard for first-time homebuyers to make ends meet?
First-time homebuyers often run into trouble paying bills at first, due to all the expenses they rack up along the way.
To make things easier, first-time homebuyers should consider starting side hustles before looking for a house to save as much money as possible. This can include driving for Uber or Lyft, walking dogs, or managing social media, to name just a few.
The more you work and put money aside for growth, the easier it becomes to stay on top of your personal finances.
What’s a realistic savings goal when buying a new home?
It largely depends on your situation and your strategy. Buyers with an excellent credit score and a sizable income may be able to put less than 20% down. On the other hand, people with poor credit may have to put down 20% of the purchase price or more. Try to improve your credit score as much as possible before shopping for a mortgage.
Looking at the numbers, if a house costs $200,000, you would need at least $40,000 for 20% down—and that’s just one expense to consider. It’s a good idea to come to the table with at least double that sum in the bank when saving for a house.
Is being a homeowner harder than renting?
Homeownership can be immensely difficult if you’re unprepared for the slew of financial challenges coming your way. The more you plan and save in advance, the easier buying and managing a home becomes.
It’s also worth considering the type of property at hand. Buying a house comes with many additional responsibilities. If you prefer not to deal with maintenance, a condo or townhouse might make more sense than a single-family home. You’ll still pay for maintenance through homeowners association (HOA) fees, but it’s less overall work.
What is a mortgage calculator?
A mortgage calculator is a free online tool you can use to calculate the estimated monthly payment for a home. For example, The Motley Fool offers a free mortgage calculator that’s very useful for homebuyers.
All you have to do is plug in some figures such as the purchase price, down payment, and mortgage rate, and the calculator will give you a rough estimate of what you can expect to pay each month.
The Bottom Line
How much you save and accrue in interest will go a long way in determining what type of house you can afford. If you want to buy a dream home that checks all your boxes, then you’re going to need to start saving aggressively to fund the purchase.
Start by forming a budget and looking for ways to allocate more income into higher interest savings accounts for short-term and medium-term growth.
The key is to remember that home buying may seem impossible, but almost anyone can do it with enough persistence. Keep working hard and put as much as possible into a down payment fund early on, and you’ll be ready to make an offer on your dream home before you know it!
The post Where to Save Money for a House appeared first on Millennial Money.
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