So you’ve decided to buy your first home! Before you start scrolling through real estate listings and filling out paperwork to get prequalified, you’ve got something more important to think about, though: getting a down payment in place.
While many things can affect your choice to rent or own, one of the biggest hurdles to homeownership is usually financial. If you’re a renter looking to become a homeowner, the best thing you can do to help make your dream a reality is to have a financial plan in place to help you get there. Build your down payment nest egg now, and set it up to grow.
How much to save?
It’s generally recommended that you put a 20% down payment on a home. This can help lock in a lower monthly mortgage payment. It can also save money on interest and insurance in the long run.1
Accumulating the money to cover a 20% down payment, however, requires some planning that doesn’t stop with putting money aside each paycheck. Depending on how soon you plan to buy, you’ll want to make sure you have access to your money when you need it. You’ll also reach your goal faster if your savings can grow along the way. Here are some ways to pick up the pace.
Direct your dollars into a money market account or high-interest savings account.
Finding a place to park your short-term savings and earn a decent return is particularly challenging if interest rates are at historic lows. It’s worth searching for accounts that offer higher-than-average interest rates — which can keep your money working harder for you. Plus, with these types of accounts, your money will still be accessible to you when you need it.
If your homeownership runway is a little longer, consider a certificate of deposit (CD).
CDs are savings certificates with a fixed interest rate and maturity date. These conservative investments can be suitable if you won’t need access to your funds until after the maturity date, which can be three to five years. Keep in mind that there are penalties for early withdrawal — so choose your timeframe and terms wisely.
Investing your money in the stock market? It could be an option.
The key consideration here is how long you expect to have your money in the market. If your time frame is less than five years, you want to be thinking of your down payment as savings, not an investment. Stocks are riskier than CDs, money market accounts, or other high-interest savings accounts. You might make more money if you put your dollars into the stock market — but you could lose a good amount, too. If you’re not planning on buying a home in the next five years, you might consider investing some of your down payment. To minimize risk, however, you should make sure you’re diversified (so, not invested 100% in stocks), and actively reduce the amount of risk in your portfolio as you get closer to your target home purchase date.
Homeownership is a major life step and accumulating enough savings to make it happen can be a tall order. Taking a strategic approach to how and where you save, however, can help turn your homeownership dream into a reality.