Park Home Down-Payment Savings in CDs?

Dear Dr. Don,

I'm saving up for a new home. I currently have $70,000 for the down payment, and I have been advised to put it in a certificate of deposit while I'm waiting to find a place to buy. The CD has a 90-day penalty for early withdrawal. Is this good advice? What would you suggest? And where can I find a list of good CDs? Should I divide my money into several CDs? It looks like the five-year CDs require a $100,000 investment.

Thanks for your advice!

-- Ellen Enliven

Dear Ellen, When would you like to buy that home? Are you looking to add to your down payment before pulling the trigger, or are you out looking at homes now?

If you're looking at homes now, then you shouldn't be overly concerned with maximizing the yield on your down payment fund. You'll want to protect principal, and you can do that by holding the money in a Federal Deposit Insurance Corp.-insured or National Credit Union Share Insurance Fund-insured deposit with a bank or credit union. It doesn't make sense to buy a CD with a 90-day penalty if you're currently in the market for a home.

You can find five-year CDs on Bankrate.com that aren't "jumbos" -- CDs that require a deposit of at least $100,000. You can find banks that will welcome your $70,000 in a five-year CD. In fact, using Bankrate's search function, I found a five-year CD yielding 1.85%. That's the same rate that was available for a jumbo CD.

I don't see a need to spread the money over different banks, or even different CD maturities, if the money is held as an insured deposit. You're better off focusing on finding that new home and getting into a low-rate mortgage than you are focusing on the yield on your down-payment fund.

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