The Best Places to Invest Down Payment Money

Figurines on a stack of coins, miniature house in background

Stock 4B-RF / Getty Images

If you're saving money for a down payment on a home or other real estate, then the best place to invest it to earn a return on your cash until you need it is nowhere. Because these types of funds need to be accessible to you quickly when you need them, it's not a good idea to 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 United States government. That's because it's the only way to truly protect the absolute value of your money—a strategy called capital preservation.

That still leaves the question: What should you do with the money you're saving for a down payment? There are a handful of appropriate places to safely store that money until it comes time to purchase your property, including FDIC guaranteed bank accounts, FDIC insured certificates of deposit, U.S. Treasury bills, money market accounts, and U.S. savings bonds.

FDIC Guaranteed Bank Accounts

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 up to $250,000.

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, say 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 they will pay you.

This option is best if you don't need your funds for quite some time—not for funds that you need to access in the short-term. If you know you won’t buy a home for, say, at least six months, you might get more favorable terms by buying a CD.

If you do 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. They are considered one of, if not the, safest of all places to park your cash. That’s because each Treasury bill is backed by the full taxing power of the government so, in theory, a default is impossible.

You buy Treasury bills at a discount and when they mature, you receive the full value. These only make 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 it practical.

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.

A money market fund, on the other hand, is a more complex mutual fund type investment that buys all kinds of cash equivalent assets. These are typically not FDIC insured.

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 don't even think about it.

U.S. Savings Bonds

US savings bonds come in two primary types: The Series I savings bond and the Series EE savings bond. Both have unique benefits.

If you are more than a year away from needing your down payment money, they provide significant benefits, because investors are guaranteed to never lose money. That level of protection is vital when dealing with money that you need, such as down payment cash for real estate.