With current real estate prices, it can be difficult to save for the down payment on a home. Using the right assets can help improve your balance.
When you actually need the money is the “biggest driving factor,” said Ryan Dennehy, principal and financial advisor at California Financial Advisors in San Ramon, California. The company ranked No. 13 on the 2024 CNBC FA 100 list.
“Do you need the money in six months or do you need the money in six years?” he said.
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This timing is important because financial advisors generally recommend keeping money out of the market for short-term goals. There may be more flexibility with medium-term goals of three to five years, but it is still wise to prioritize protecting your balance. After all, you don't want a bad day on the market to affect your ability to make an offer on a home.
But that doesn't mean that your down payment balance has to be in a simple savings account.
Here's how to find out how much money you might need and some of the options you can use to safely grow your credit:
How much you need for a deposit
Knowing how much money you may need will help you better assess your timeline and appropriate assets for your down payment.
According to the Federal Reserve's U.S. Census, the average sales price of U.S. homes was $412,300 in the second quarter of the year. That's down from $426,800 in the first quarter and the peak of $442,600 in the fourth quarter of 2022, the Fed reports.
For example, if a home buyer wants to put down a 20% down payment on a $400,000 home, they might need to save about $80,000, said certified financial planner Shaun Williams, a private wealth advisor and partner at Paragon Capital Management in Denver. The company is ranked 38th in the FA 100.
Do you need the money in six months or do you need the money in six years?
Ryan D Dennehy
Financial Advisor at California Financial Advisors in San Ramon, California
Of course, a 20% deposit can be traditional, but it is not mandatory. Some loans only require a 5% down payment, a 3% down payment, or no down payment at all. Down payment assistance programs can also cover part of the bill.
According to the National Association of Realtors, the average down payment in 2023 was about 15%, with first-time buyers typically paying closer to 8% and repeat buyers paying around 19%.
However, keep in mind that if you put less than 20% down, the lender may require you to purchase private mortgage insurance. According to The Mortgage Reports, PMI can cost between 0.5% and 1.5% of the loan amount per year, depending on factors like your credit score and down payment.
4 Ways to Boost Your Down Payment Savings
Here are some options advisors say are worth considering, depending on when you want to buy a home, how much you've already saved, and how accessible the money needs to be:
1. CDs
With a certificate of deposit, you can “lock in” a fixed interest rate for a specific period of time, Dennehy said. You can purchase a CD through a bank or brokerage account.
The terms for CDs can range from months to years. The annual percentage return depends on factors such as the applicable interest rate, the term of the CD and the size of the deposits.
If you need to access the money before the CD's maturity date, a bank may impose a penalty that wipes out some of the interest earned, Dennehy said. Some banks also offer penalty-free CD options.
With brokered CDs, there are often no penalties for early withdrawal, but you are subject to the value of the CD in the secondary market, he said. Selling fees may also apply.
As of Oct. 23, the top 1% one-year CDs earn about 5.22% APR, while the national average rate is 3.81%, according to DepositAccounts.com.
2. Treasury bill
Treasury Bills are backed by the US government and are an asset that offers you a guaranteed return with maturities ranging from four to 52 weeks. Depending on where you buy, the asset may be less liquid.
Yields on government bonds are currently well over 4%.
You can purchase a short-term treasury or a long-term treasury depending on your target timeline, Dennehy said.
Treasury interest is subject to federal tax, but not state or local income tax. Compared to CD rates, Treasurys can offer a “comparable interest rate with lower tax implications,” said CFP Jeffrey Hanson, partner at Traphagen Financial Group in Oradell, New Jersey. The company ranks 9th in the FA 100.
High-interest savings accounts [are] great if you want to buy it next year.
Shaun Williams
Private wealth advisor and partner at Paragon Capital Management in Denver, Colorado
3. High-interest savings accounts
A high-yield savings account offers a higher-than-average interest rate compared to traditional savings accounts, so your money grows faster.
The top 1 percent average for high-yield accounts is 4.64 percent as of Oct. 23, according to DepositAccounts.com. For comparison, the national average for savings accounts is 0.50%.
Due to its easy accessibility, a HYSA is particularly suitable if you are about to start looking for a house.
“High-interest savings accounts [are] “Great if you want to buy something next year,” Williams said.
4. Money market funds
A money market fund generally has a slightly higher return than a HYSA, Dennehy said. Some of the highest-yielding retail money market funds are at nearly 5% as of Oct. 23, according to Crane Data.
But a HYSA is usually through the Federal Deposit Insurance Corp. insured. It's not a money market fund, Dennehy said.
Nevertheless, according to Vanguard, money market funds are considered low-risk and should not lose value. Vanguard notes that she may be eligible for $500,000 in coverage under the Securities Investor Protection Corp. (SIPC) if they are held in a bank account.