Where to Keep the Money You're Saving for a Home

It could take a while to save for a home. Here's where to house that cash.

Saving up to buy a home is a process that could be several years in the making. Though most mortgage lenders don't require a 20% down payment for a conventional loan, if you don't bring 20% to your closing, you'll be hit with private mortgage insurance (PMI). PMI is a costly premium that makes homeownership more expensive, so many buyers aim to avoid it.

If you're in the process of saving to buy a home, you may be wondering where to keep your money. You may be tempted to put that cash into a brokerage account, where you can invest it and grow it into a larger sum. But keeping your down payment in a savings account is a much better bet.

Why you shouldn't invest your down payment

When you invest money, there's the potential for the value of your investments to go down. That's a risk you can't afford to take with funds you might need in the near term.

As a general rule, you shouldn't invest money in the stock market that you expect to need within seven years. The reason is that stocks might crash during that time and it could take a while for your portfolio to recover.

That's why you're better off keeping your home down payment in the bank. If you're saving for a home over a three-year period, that's too short a window to safely invest in stocks without running the risk of having to take losses.

What about saving for a home down payment in a CD?

The upside of putting your down payment into a savings account until it's complete is that your money is protected for up to $250,000 per depositor. If you and a spouse are saving up to buy a home together, even if you're looking at a $300,000 down payment, you can securely keep that money in a savings account without worry.

The downside, of course, is that you'll earn minimal interest in a savings account these days. Instead, you may be inclined to put your down payment into a CD, or certificate of deposit, since CD rates can be higher than savings accounts rates. And to be clear, you get that same $250,000 worth of protection with a CD.

Putting your down payment into a CD isn't a bad idea when CD rates are considerably higher than savings account rates. Right now, both sets of rates are comparable and quite low. There's not much to be gained by putting your down payment into a CD. But if you know you won't be buying a home for at least another year, and you're able to snag a notably better rate on a one-year CD than you'd get in your savings account, then that could be a smart move.

In some markets, a starter home can cost $500,000 or more, and so coming up with 20% of that purchase price is something that's apt to take time. As tempting as it may be to invest your down payment funds to fuel growth, doing so is risky. You're better off keeping your money in the bank, even if it means delaying your foray into homeownership a bit longer.