The 4 best places to put your money when saving for a house

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If buying a home is in your future, you’ll want to start saving up. But where should you keep your money?

When saving for a down payment, it's essential to keep your money in a safe and accessible place while also earning some interest. It also depends on your time horizon and when you plan to buy a home.

But one thing’s for sure: Separate your down payment savings from your emergency fund to help you stay on track and purchase a home on your timeline.

The best savings accounts for buying a home

When saving for a house, choosing the right savings account can help you maximize your earnings and reach your goals faster. Here are some of the best savings account options for future homeowners. 

High-yield savings accounts

High-yield savings accounts offer significantly higher interest rates than traditional savings accounts, allowing your money to grow faster. 

Many online banks and credit unions offer high-yield savings accounts with competitive rates and low or no minimum balance requirements.

Money market accounts

Money market accounts combine the features of checking and savings accounts, often providing higher interest rates than traditional savings accounts. They may also offer check-writing capabilities and debit card access, making it easier to manage your funds while still earning interest.

Certificates of deposit (CDs)

Certificates of deposit (CDs) are savings instruments that offer fixed interest rates for a specific term, typically ranging from a few months to several years. 

CDs generally provide higher interest rates than savings accounts, but you'll need to keep your money locked in for the entire term to avoid early withdrawal penalties.

Individual retirement accounts (IRAs)

While primarily designed for retirement savings, Individual Retirement Accounts (IRAs) can also be used to save for a first-time home purchase. 

Both traditional and Roth IRAs allow you to withdraw up to $10,000 for a first-time home purchase without incurring the usual early withdrawal penalties.

How much do you need to save to buy a house?

The amount you need to save will depend on various factors. It's recommended to save at least 20% of the house's price for a down payment. There are options available with lower down payment requirements, like FHA loans (3.5% down) or conventional loans (5% down).

Another cost to consider is closing costs, which are fees tied to finalizing the purchase of a home. This includes appraisal fees, attorney fees, title insurance, and more. Closing costs may range from 2%-5% of the home's price.

It's also wise to have some money set aside for unexpected expenses that may come up after you buy the house. Aim for an emergency fund of 3-6 months' living expenses. Don't forget about moving costs, furniture, appliances, and any other renovations you may want to do once you move in.

To get a rough estimate, let's assume you're looking at a $300,000 house. Saving 20% for the down payment would be $60,000. If you include closing costs and other expenses, a conservative estimate may be around 25% to 30% of the house price, which would be $75,000 to $90,000.

You’ll also want to have a good idea of what your mortgage payments will look like once you buy. You can use a mortgage calculator to figure out your monthly payments.

How to save money for a house: a step-by-step plan

Saving for a house can be a challenging but rewarding process. Follow these steps to create a plan and stay on track:

1. Figure out your savings target 

Start by setting a clear savings goal based on your target home price, desired down payment, estimated closing costs, and emergency fund needs. Having a specific number in mind will help you create a focused savings plan.

2. Create a budget 

Analyze your current income and expenses to create a budget that prioritizes saving for your house. Look for areas where you can cut back on spending and redirect that money toward your house fund.

3. Automate your savings 

Set up automatic transfers from your checking account to your designated house savings account each payday. This will help you save consistently and reduce the temptation to spend the money elsewhere.

4. Boost your income 

Consider ways to increase your income, such as taking on a side job, freelancing, or selling unwanted items. Dedicate any extra earnings directly to your house savings fund.

5. Reduce high-interest debt 

Pay down high-interest debt, such as credit card balances, to free up more money for savings and improve your credit score, which can help you secure a better mortgage rate.

6. Explore down payment assistance programs

Research down payment assistance programs in your area, such as grants, forgivable loans, or tax credits. These programs can help you reach your savings goal faster and reduce the amount you need to save.

How to pick the right savings account when saving for a house

Savings accounts aren’t a one-size-fits-all type of deal. You’ll often find they share similarities, and each has the potential to help you grow your down payment savings faster. Still, there are some key factors to consider, including:

• Interest rates: You’ll earn interest or an annual percentage yield (APY) on your savings. Ideally, you want an account with a high APY. “High-yield savings accounts are a safe and accessible option, offering competitive interest rates to help your money grow steadily,” says Melara.
• Minimum balance requirements: Many high-yield savings accounts require you to maintain a minimum daily balance to earn the highest possible interest rate. You may get a lower return on your money if you can’t meet this threshold.
• Minimum deposit requirements: It’s also not uncommon for financial institutions to require a minimum deposit to open an account. That said, there are high-yield savings account offerings from online banks that don’t have this rule.
• Fees: Does the account come with monthly maintenance fees and other costs? Can you have the fees waived if certain conditions are met? Ideally, you want a savings account option with little or no fees to maximize your earnings.
• Accessibility and convenience: Do you prefer in-person support, or does an online bank work for you? Online banks typically feature savings accounts with more competitive rates and lower fees than traditional accounts from brick-and-mortar banks.
• Liquidity: Is there a chance you’ll need to pull from the funds soon, or do you have an adequate emergency fund elsewhere?

The bottom line

Saving for a down payment may seem daunting, especially when mortgage rates are high. But that doesn’t mean you should put your homeownership dreams on hold. Start by creating a realistic savings plan and strategically selecting where to stash your cash. That way, you’ll be one step closer to saving up for a down payment to buy your first or next home.

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