Should You Keep Your Home Down Payment in a CD?

During the past two years of higher interest rates, home mortgage rates have climbed to uncomfortable levels that have made homes less affordable. As a result, many first-time home buyers are stuck on the sidelines of the housing market. If you've been saving up for a down payment on a house, you might be tempted to keep that down payment cash in a certificate of deposit (CD) to earn a fixed APY.

But here's the problem: CDs are not always the best place to keep your home down payment. It's true that locking in a high APY can be a good reason to open a CD. But there are a few risks and downsides to CDs, too -- especially for short-term savings like a down payment on a home.

Let's look at a few reasons why you should not keep your down payment money in a CD.

CDs charge early withdrawal penalties

I've never been a big fan of CDs because CDs -- unlike savings accounts and money market accounts -- force you to lock up your money. Yes, with CDs, you can get a good APY for a fixed length of time. But if you need to take your money out of the CD sooner than expected, the bank can charge you an early withdrawal penalty. These penalties can cancel out most (or all) of the interest you were expecting to earn from the CD.

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Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings On Capital One's Secure Website. Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
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When you commit your money to a CD, you're making a promise to the bank -- and you're also taking a risk. Not every saver can truly afford to leave their cash alone long enough to avoid early withdrawal penalties. This is a big risk of CDs that deserves more attention, and it's a good reason to avoid using CDs for your home down payment.

The best CD rates aren't better than the best savings accounts

The biggest reason to keep your home down payment in a CD instead of a savings account is to get higher growth for your savings. But CDs don't necessarily give you any extra growth. The best savings accounts (as of July 10, 2024) are paying APYs of 5.00% or more, which are the same as, or better than, the best CDs.

If the yields are the same with a savings account vs. a CD, why not just keep your money easy to access with no early withdrawal penalties? You can get your cash out of your savings account at any time, and you get to keep every penny of interest.

You never know when you'll need your down payment cash

Saving for a home down payment can be unpredictable. You might have a well-intentioned plan to buy a home in two years, but it might take you longer to save up -- or you might find a great house sooner than expected. Your home down payment is a special kind of short-term savings fund because you never know exactly when the right house is going to be available.

Here are two reasons why this unpredictability makes CDs a bad choice to hold your down payment.

1. You can't add more money to a CD

Most CDs require you to make a single one-time deposit. You can't put more money into a CD each month like you can with a savings account or money market account. (There is a special kind of CD called an "add-on CD" that lets you increase the amount of your CD deposit over time, but most banks don't offer it.)

If you're trying to save for a down payment on a home purchase that's still a few years away, CDs don't give you the flexibility to add to your savings each month.

2. You can't get your CD money out on short notice

Sometimes buying a home requires you to make massive decisions and big money moves on short notice. Especially in today's tight housing market, you might find a house you love and decide to make an offer sooner than you expected. Or if interest rates come down soon, if the Fed cuts interest rates in 2024, this could unlock the logjam in the housing market and make it easier for buyers to start making offers.

CDs are a bad fit for this kind of short-notice withdrawal because of those pesky early withdrawal penalties. If you find your dream home tomorrow but your down payment is locked up in a CD for nine more months, you might have to swallow a bitter pill and pay early withdrawal penalties on potentially tens of thousands of dollars of cash -- or miss your chance to make an offer on the house.

Bottom line

Most home buyers need flexible timing and easy access to their down payment cash more than they need the highest CD rates. CDs can be useful for some savings goals, but most home buyers should steer clear of using CDs for home down payment money. Instead of a CD, the best savings accounts and money market accounts are usually the best choices to keep your home down payment.