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The best place to save a down payment is somewhere you can access it when you need it.
- The best place to save a down payment for a home isn't necessarily where it will grow the fastest - it's where the money will be available when you need it.
- That's according to a financial planner who says establishing your time frame is the first, most important part of establishing a savings plan for a down payment.
- She also says you don't need to be overly concerned with diversifying your savings in this case; it's easier to keep them in one place, and the returns on cash-like investments don't tend to be terribly different.
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When it comes to buying a house, the fun parts - like an opportunity to decorate a brand-new place - are often overshadowed by the not-so-fun-parts - like saving up for a down payment.
If buying a home is in your future, Molly Stanifer, CFP®, financial advisor with Old Peak Finance, says it's time to make a strategy for saving.
"Steer away from holding your money in something that would not be available when you may need it," she said. "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."
To determine the best way to save for your home, you'll need to start with your time frame.
"Typically, if you've already decided you want to buy a house, you probably want to buy it within a few years," said Stanifer. If that's the case, the best place to keep savings to be used within a few years is in something liquid with a low chance of fluctuating in value.
"A savings account at your bank or credit union or a non-retirement brokerage account invested in a money market or a short-term bond fund would be appropriate," Stanifer said. "They are both liquid - or could be withdrawn easily - and have a low chance of changing much in value from the time you put the money in to the time you need it."
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If your time frame for buying is longer than five years, you could look into products that will likely net you more in interest but that may be more volatile. For example, "you can start looking at stocks as a portion of the savings when the time frame is longer than five years," Stanifer added.
She also advises steering clear of diversifying the money that you're saving up for a down payment into too many different types of accounts. "There likely isn't too much of a difference in expected investment return from one cash-like investment, like money markets or CDs, to another, so I recommend not over-complicating it," she said. "Also, when you're ready to make a down payment, it will be easiest to do from one account."
Once you've determined where to save your money, you'll also need to figure out the how. "I often help clients make a savings policy when they've set a financial goal," said Stanifer. "It includes a monthly automatic amount and then a percentage of any larger inflow, like a bonus. That will give a pretty clear expectation of when and how to accomplish the goal. Then, the client could set their own goals of cutting back spending or saving additionally beyond the automatic amounts to reach their goal faster."
As far as how much you should save for a down payment, the answer to that is: it depends. "If a loan is available to a client with less than 20% of a down payment and does not require Private Mortgage Insurance, it's worth comparing to a traditional loan," Stanifer said, referring to a type of insurance that protects the lender if you put down less than 20% and have to stop making payments on your loan. "If it is not, we recommend to plan for at least a 20% down payment."
A little planning will help you reach your ultimate home-buying savings goal, but there's one other ingredient that's equally as important. "Once you have a plan and time frame mapped out, try to be patient," said Stanifer. "Also, don't forget to budget for ongoing house maintenance expenses, as well."
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