If you're saving money for a down payment on a home or other real estate, you may be tempted to invest that money while you're waiting for your dream home. But a volatile or long-term investment isn't the right place to park your down payment money.
Because these types of funds need to be stable and quickly accessible when you need them, it's not a good idea to tie up your money or take on the risk that comes with investing. Instead, it's wise to put it in one of a handful of cash equivalents that are protected by deposit insurance or the U.S government. This is the only way to truly protect the absolute value of your money—a strategy called "capital preservation."
But what can you do to guard your money and still have it growing while you wait? There are a few great places to safely place money until you want to purchase your home. These include FDIC-guaranteed bank accounts, FDIC-insured certificates of deposit, U.S. Treasury bills, money market accounts, and U.S. savings bonds.
- Standard bank accounts and certificates of deposit are excellent places to store down payment funds.
- Treasuries and money market accounts can also protect your money.
- Savings bonds can protect your money but have limitations on accessing the funds.
FDIC-Guaranteed Bank Accounts
Standard bank accounts are always a safe place to store your cash. These include checking accounts and savings accounts at FDIC member banks. Not only can you access your money during regular banking hours without any penalty, but if your bank fails, the government will reimburse you for losses up to $250,000. The downside to these accounts is that they earn little to no interest, so your down payment money won't keep up with inflation.
FDIC-Insured Certificates of Deposit (CDs)
Offered by FDIC member financial institutions such as many community banks, a certificate of deposit is a special type of contract where you lend money to the bank for a specific amount of time, such as three months or two years, in exchange for a guaranteed rate of return. Typically, the longer you agree to tie up your money at the bank, the more interest it will pay you.
This option is best if you don't need your funds for quite some time. If you know you won’t buy a home for at least six months, you might get more favorable terms by purchasing a CD.
If you need to access your money sooner than the maturity on the CD, then the bank may charge you as much as six months’ worth of interest as a penalty.
U.S. Treasury Bills
These are obligations of the U.S. government that mature in one year or less. Because each Treasury bill is backed by the full taxing power of the government, they are considered one of the safest places to park your cash.
You buy Treasury bills at a discount and, when they mature, you receive the full value. This option only makes sense if you have a good amount of money already saved for a down payment on your house. You’d need at least $10,000 or $20,000 to make the investment worthwhile.
Money Market Accounts—but Not Money Market Funds
A money market account at your local bank can be a great way to protect your money while earning much higher interest rates based on how much you have to deposit. These accounts are often FDIC insured, protecting you from the potential problems arising if your bank were to fail.
On the other hand, a money market fund is a more complex mutual fund investment that buys all kinds of cash equivalent assets. These are typically not FDIC insured and thus are not a good place to invest your down payment money.
Always ask your banker whether or not your money market account is FDIC insured. If it is, then it should be a safe place to park your down payment savings. If it's not, then keep looking.
U.S. Savings Bonds
U.S. savings bonds come in two primary types: The Series I savings bond and the Series EE savings bond. Both have unique benefits and offer very similar terms. They aren't a good option if you need the money soon, as each must be held for at least a year and come with withdrawal penalties if you take out your money in less than three years.
If you are more than a year away from needing your down payment money, though, these bonds offer significant benefits, because investors are guaranteed never to lose principal. That level of protection is vital when dealing with money you need, such as down payment cash for a real estate purchase.