Is Sticking Your Home Down Payment Funds in a CD a Smart Bet?

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KEY POINTS

  • CDs generally offer higher interest rates than regular savings accounts.
  • It could pay to keep your down payment on a home in a CD, but that'll depend on how far along you are in the savings process.

It really depends on your situation.

Buying a home is challenging these days -- namely because home prices are up on a national level. That means if your goal is to make a 20% down payment, you'll need to save up a lot more cash than you would've needed a few years ago.

If you're in the process of saving for a home, you may be eager to expedite things so you can stop renting and start owning as soon as possible. And you may be inclined to do what you can to earn a higher return on your money to achieve that goal.

Now, one thing you should know is that investing your home down payment funds in a brokerage account is generally not a great idea. When you invest, you run the risk of losing money, which could hinder your home-buying plans rather than make them a reality sooner.

But what about CDs? The upside of putting money into a CD is that you'll generally snag a higher interest rate on your cash than you will in a regular savings account.

But is locking up your home down payment funds in a CD a wise idea? Or will it backfire on you?

How soon do you think you'll need that cash?

The benefit of saving in a CD is scoring a higher interest rate on your cash. But in exchange for that higher rate, you're making a commitment to keeping your money tied up for a preset period of time. And if you cash out a CD before it comes due, you'll risk being penalized to the tune of a few months of interest. That could be a huge setback if you're trying to meet a big financial goal, like buying a home.

That's why locking up your down payment funds in a CD can be risky. If you open a CD and then want to make an offer on a home before it comes due, you'll risk being penalized -- or, you'll end up having to delay your home purchase to avoid a penalty, thereby potentially missing out on a huge opportunity.

With that said, keeping your home down payment funds in a CD isn't necessarily a bad idea. But it really depends on where you are in the savings process.

Let's say you're hoping to save $50,000 to make a 20% down payment on a $250,000 home. If you've been saving for a year and have accumulated $15,000 so far, that's great progress. But it also means you're probably not looking at buying a home this year. So in that case, if you were to put your $15,000 into a 12-month CD, you might snag a better interest rate on your money without taking on a ton of risk.

But let's say you've amassed $40,000 of the $50,000 you're aiming for. If so, there's a chance you'll have enough cash to put down on a home at some point within the next year. And so you probably don't want to limit your options or open yourself up to penalties by opening a CD.

A regular savings account is not a bad choice

You might earn more money in a CD than a savings account. But savings accounts today are actually paying pretty generously. So if the idea of putting down payment funds into a CD just doesn't sit well with you, don't do it. Instead, stick to a regular savings account, which won't impose restrictions and will give you full access to your money at any time.

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Two of our top online savings account picks:

Rates as of Jul 24, 2024 Ratings Methodology
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American Express® High Yield Savings Western Alliance Bank High-Yield Savings Premier
Member FDIC. Member FDIC.
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Rating image, 4.50 out of 5 stars.
4.50/5 Circle with letter I in it. Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
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APY: 4.25%

Rate info Circle with letter I in it. 4.25% annual percentage yield as of July 23, 2024

APY: 5.31%

Rate info Circle with letter I in it. 5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY.

Min. to earn APY: $1

Min. to earn APY: $500 to open, $0.01 for max APY

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