Is This Account a Good Place for Your House Down Payment?

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Saving to buy a home? Here’s why you might consider opening a CD to hold some of that cash and give it time to grow. 

It’s fair to say the first big expense (and perhaps the biggest hurdle) you’ll face on the road to homeownership is your down payment. While it’s not true that you must make a down payment of 20%, if you do, it will likely be easier to get approved by a mortgage lender — and perhaps also result in a lower interest rate. Plus, you won’t have to pay for private mortgage insurance (also known as PMI), which will help you save money on what is already going to be a consequential money move.

There are a few options for where to keep your down payment

Whether you’re planning to make a 20% down payment or not, you might wonder where you should keep that cash. If you’re still actively saving, it’s likely easier to open a high-yield savings account, because right now, they are paying upwards of 4% APY, which could generate a nice return on your thousands of dollars’ worth of down payment. You could also consider a money market account for the same reason (plus, you’ll get easier access to that money if a home purchase is in the very near future for you). You can keep adding money to both of these accounts over time.

But let’s face facts. It’s not a great time to be a potential home buyer, as mortgage rates are holding steady over 6%, and there just isn’t a sufficient supply of homes on the market to satisfy all who want to buy. So let’s say you’ve got your down payment ready, and you’ve decided to relax for a few months (or longer) and see where interest rates go. This is a very valid choice, especially since a home purchase ideally isn’t something you rush into. Have you considered opening a CD?

Why consider a CD for your down payment?

A certificate of deposit (CD) might just be the solution you’re looking for in the meantime. Unlike a savings or money market account, when you put money into a CD, you’re agreeing to lock it away for a period of time (often three months to five years or longer), in exchange for earning interest on it. If you withdraw the money before the CD term is up, you’ll lose some of that earned interest as a penalty. This could be a good thing, as you won’t be tempted to withdraw early for expenses other than buying a home.

The best CDs are paying upwards of 5% right now. Those rates may start to come down if the Federal Reserve takes a break from hiking interest rates, so if you’ve been considering a CD, now might just be the time to open one.

CDs have another thing going for them: safety. After several high-profile bank failures in 2023, a lot of people are nervous about keeping large amounts of money in the bank. But just like a savings account or a money market account, CDs are FDIC insured, meaning that up to $250,000 of your money will be returned to you in the event of a bank failure.

A certificate of deposit might not be the first place that comes to mind when you decide where to keep money you’ve saved for a goal several months or years in the future (like a home purchase), but they are worth thinking about. And with the potential for rates to fall later this year, if you’re thinking about a CD, strike now and lock in a good rate so you can protect and grow your cash.

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