Should You Keep Your Home Down Payment Fund in a CD?

At the end of 2023, the median price of a home was $417,700. If you're making a 10% down payment to buy a typical home, you'd need $41,770. And if you were putting down 20%, which is necessary to avoid getting stuck with private mortgage insurance, you'd need double that amount.

If you're like most people, it's going to take you some time to save up so much money. As you're working on doing that, you'll have to decide where to put the cash you're saving. A CD is one option for storing your funds, but is it the right one?

Putting your down payment funds in a CD could have some big advantages

There are two really big advantages to buying certificates of deposit with the money you're planning on using to buy a house one day:

• You can usually get a high interest rate without risking your money. You can buy an FDIC-insured CD paying a competitive rate and not risk losing money. Often, CDs provide a better return on investment (ROI) than a high-yield savings account. These high returns can make saving up your down payment money a whole lot easier.
• Your ROI is guaranteed. With a CD, the rate of return you'll get is guaranteed. You don't have to worry about ending up earning a lower rate if economic conditions change.

With a high-yield savings account, rates are usually variable and can fluctuate depending on market trends. Although no one can predict for sure whether rates will drop this year or not, there's some evidence suggesting that may happen. The Federal Reserve has been indicating cuts are likely, because inflation is coming under control.

If rates decline, your savings account yield is likely to fall. With CDs, you don't have to worry about that since your rate is guaranteed for the entire term. If you buy a CD at 5.30% and interest rates decline dramatically, you'll still get a 5.30% ROI on the money invested.

So, if you want to lock in today's high rates and maximize the yields you get, a CD can be a great place for your down payment fund. There won't be any surprises, so you'll know exactly how much you need to put into CDs to have your down payment money by your desired date.

There are a few downsides, though

The money you deposit in a CD is going to be locked up with your bank, meaning you'll incur a penalty if you need the money sooner. While you can buy CDs with terms as short as three months (and occasionally even shorter), you still won't want to take your money out during the term.

If you know for sure that you will absolutely 100% not be buying a house in the next few months, or even the next few years, then this disadvantage may not matter much. You can just buy a CD with a term length you're comfortable with. But what if you are just about ready to buy and waiting until a perfect deal comes along? You definitely do not want your down payment funds stuck in a CD. You could be forced to choose between passing up the perfect house or losing some of your down payment funds to early withdrawal penalties.

You'll also have to deal with the practicalities of buying CDs with your down payment money. Many CDs have minimum deposit requirements, such as $500 or $1,000. If you're saving for your home down payment over time, you may have to wait until you've got enough to afford a CD. Then, you'd need to research offers available at that time to decide which CD to buy. This is more complicated than just transferring money to your savings account each month.

Plus, your CD rates are only guaranteed after you've bought a CD. If you're investing $500 toward your home down payment each month and CD rates fall over time, future CDs you buy with that $500 may have lower rates than the ones you're buying today. Of course, that's true for all the money you put into a savings account, while with CDs you'd still be guaranteed the higher yield on the certificates you bought before the rate drop.

So is it worth it?

The bottom line is, you're probably going to get a better ROI by putting your down payment money into a CD. This means it could be worth doing, as long as you're 100% sure you won't need the money until the end of the term. But you'll have to go through some extra hassle, so only you can decide if that's worth the effort.