Saving up for a down payment on a home? Put your money in this account

Every penny counts when you’re saving for a down payment on a home. Maximize your earnings with a high-yield savings account. (iStock)

Buying a home is the biggest purchase most people ever make. And, if you plan on financing your home purchase, you’re going to need a sizable down payment – ideally up to 20% of the purchase price to avoid the extra cost of private mortgage insurance (PMI). 

Unless you already have the cash on hand, you must save money over time for the down payment. But where should you save your money?  

Many people save money in their checking account or savings account, but if you would like more earning potential – without sacrificing the security of FDIC insurance – consider saving your money in a high-yield savings account.

Opening an online high-yield savings account is simple. You can compare savings rates across multiple banks in one place on Credible's marketplace.


How much money should you have in savings before buying a house?

At a minimum, you’ll need to save enough money for a down payment, which could range from 3.5% of the purchase price for a government-backed FHA loan to 20% for a conventional mortgage.

Another expense you’ll need to save for is closing costs, which cover real estate transfer taxes, mortgage taxes, appraisal fees, title insurance and other fees. Closing costs are typically between 2% and 2.25% of the home’s purchase price. That means the closing costs on the U.S. median home price of $313,000 would be between $6,260 and $7,042.50.

Your lender may also require you to have enough cash on hand after closing to make mortgage payments for the first few months. So, if you estimate your mortgage payment, including principal interest, tax and insurance, to be $1,500 per month, you should save an additional $3,000 to account for the first two mortgage payments.

Before you apply for a mortgage loan, you may find it helpful to run the numbers using an online mortgage calculator like Credible to determine your potential monthly payments. 


How to choose a high-yield savings account

Here are some of the main factors to consider when you are shopping for a high-yield savings account:

1. Interest rate. Recent FDIC data lists the national average interest rate on savings accounts at 0.04% APY, which considers both average and jumbo deposits over $100,000. Traditional brick-and-mortar banks fare the worst, often offering 0.01% APY on their savings accounts.

By contract, your money can earn up to 0.90% annually in a high-yield account. Explore Credible to discover online savings account options that could make you more money.


2. Fees, restrictions and requirements. High savings rates are a great benefit, but not if they’re offset by excessive fees. Be sure to read the fine print to ensure transaction fees, overdraft fees, monthly fees or maintenance fees won’t wipe out your earnings. Other factors to consider are the terms and account requirements some banks enforce, such as minimum balances or transaction limits, as well as a minimum opening deposit.

3. Insurance. Before you sign-up for any account, make sure the bank is insured by the FDIC or the National Credit Union Administration (NCUA). Doing so will protect the savings in your account – up to $250,000 – if the bank folds for any reason.

How do you use a high-yield savings account?

Here are a few of the best reasons to stash your cash in a high-yield online savings account:

  • Emergency savings. Having an emergency fund can help you weather unexpected expenses or tough economic times such as what we’re experiencing right now. A high-yield savings account is insured up to $250,000, so you can rest assured your money is safe, and you can access your money quickly when needed.
  • Short-term savings. If you’re saving for a short-term goal within a year or two – such as a new car or a family vacation – consider putting your money in a high-interest savings account that offers a high rate of return instead of a checking account. Don’t make the mistake of locking your money in a certificate of deposit (CD) as it may be hard to access your cash when you need to put a down payment on a home. When you’re ready to purchase a home, the last thing you want to think about is the penalty for early withdrawals that comes with most CDs.
  • Large expenses. Your money will earn more with compound interest in a high-yield savings account thanks to savings rates. The higher return on your money can provide a nice boost when you’re saving for a large purchase, such as a down payment for a home. You need all the breaks you can get when you’re saving for a large purchase, such as a home.

Are high-yield savings accounts worth it?

High-yield online savings accounts are often seen as a low-risk option to save for a short-term goal. They offer both the safety of federal insurance to safeguard your money and a savings rate that’s considerably higher than a traditional savings account or checking account.

The primary benefit high-yield savings accounts provide is the considerably higher APY rates over traditional savings accounts, often 10 to 20 times as much as some online banks. If you don’t need a brick-and-mortar location for your savings, online savings institutions could be your best option. 

Visit Credible to learn more about saving up for a down payment. You can explore your home loan options to see how much money you need to put down on a mortgage.

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