It’s easy to get intimidated when trying to buy a house during this hot housing market. You may have saved for the down payment and were ready to buy — only to lose out in a bidding war or have trouble finding the right home at the right price. If you decide to hold off on buying a house for a while, what do you do with your down payment while you wait?
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Here’s how you can make the most of that money to improve your position when you finally are ready to buy.
Think Carefully About Your Timing
The amount of time you plan to wait before resuming your home search will help you determine the best use of the down payment money. If you want to be able to act quickly when the right house comes along, you’ll invest differently than you would if you signed a year-long rental lease and decide to delay for the longer term. “If it’s a period of less than 12 months, your best bet is to let the funds continue to grow in your current savings account,” said Gerald Grant III, a certified financial planner and Equitable advisor in Washington, D.C. “The most important thing is having the money accessible when you are ready to make the purchase.”
If you think you may want to buy a house in a few months, keep the money in a safe and accessible account you can tap quickly if you find the right house — rather than risking it in the stock market or tying it up in long-term certificates of deposit.
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“Many times, we are so focused on growth that we lose sight of the value of peace of mind and access,” said Grant. “Yes, you can try to invest in a more long-term vehicle, but you run the risk of a potential market downturn at an inopportune time.”
Shop for the best interest rate – you may find slightly higher rates at a credit union or online savings account. With the large size of the down payment, even a small interest rate boost can make a difference. Keep the money separate from your everyday bank account so you aren’t tempted to spend it on other bills.
Build Your Emergency Fund
You can use some of the money to build your emergency fund while you wait. Having this money available for unexpected expenses can help you avoid landing in high-interest debt that could make it more difficult to get a mortgage and afford the house. Grant generally recommends having at least three months’ worth of expenses in an emergency fund before making any investments.
The emergency fund becomes even more important after you become a homeowner and can face many more unexpected costs, such as having to repair a leaky roof, replace a broken refrigerator, clean up a flooded basement or remove a fallen tree. It helps to prepare for these potential expenses before you buy the house, rather than ending up in financial trouble if they happen.
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Pay Down Debt
“If you’re in a position where you’ve saved up a lot of money for a down payment but have decided to hold off on buying a home, you might benefit from using some of the cash you saved to pay down your other debts, especially high-interest debt like credit card debt,” said Jacob Channel, LendingTree senior economic analyst. “When preparing to buy a home, you’ll usually want to find a balance between boosting your savings and paying off your other debts.”
Paying down debt can help in several ways. After you pay off high-interest debt, you won’t have to spend as much money in interest every month and you’ll have more available to build up your down payment fund and pay your mortgage.
Also, part of your credit score is based on your credit utilization ratio, which is the amount of available credit you’ve used (your credit card balances compared to your credit card limits). Paying down this debt can help you improve your credit score, and may ultimately help you get a better mortgage rate.
“Using some excess cash to pay down other debts as opposed to just hoarding it all for a down payment could help increase a borrower’s credit score and result in them getting a better rate,” said Channel. “In addition to having better credit, those who pay down other debts before they get a mortgage might have an easier time paying for that mortgage because they have fewer payments to worry about.”
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Invest for the Longer Term
You can invest the money differently if you don’t plan to buy a house for a longer time period — especially if you’ve already built up an emergency fund and paid down high-interest debt.
“If your decision is to not buy a home for a few years, this would be a good time to revisit and reevaluate your financial goals and priorities,” said Grant. “If you don’t have any debt and a long enough time frame, you could begin to look at some short-term or mid-term investments like balanced mutual funds, exchange-traded funds, stocks and bonds. This would allow you to still have access to the funds and potentially get more growth than in your bank account, but the focus wouldn’t be on high returns. If you were playing baseball, we’d be just trying to get on base; we’re more concerned about singles and doubles than home runs.”
Keep Adding To Your Down Payment
After you’ve covered your other bases, you can continue to build your savings, too. “If you have the cash flow to continue saving and a long enough time frame, you can take a portion of the funds, invest them in something more mid-term or long-term, and use your monthly savings to rebuild the down payment funds,” said Grant.
Even though you may be able to buy a house with a smaller down payment, you’ll usually get the best mortgage rate if you can put down 20% or more.
“A common misconception that many homebuyers have is that they need a 20% down payment to buy a home,” said Channel. “Depending on the type of loan they get as well as other factors like their credit score, some buyers might even be able to put down considerably less than 10%. That being said, the more money you put toward a down payment, the lower your mortgage rate and monthly payment are likely to be. So even if you don’t necessarily need a down payment of 20% or more to get a loan, it might not hurt to put some extra cash down.”
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Reassess Your Timing
You may have been burned by the hot housing market, but waiting doesn’t always make it better.
“Even for the most seasoned real estate professionals, timing the market is incredibly difficult. It’s impossible to predict the future, and there are many instances where people find that waiting just makes things more difficult,” said Channel. “So if you’ve got the money for a home and you’re in a place where you’re ready to take on the responsibility of being a homeowner, then there’s nothing wrong with buying now, even if the market is crazier than usual.”
If you do decide to delay, continue to focus on getting your finances ready to buy a house. “If you do decide to delay your homebuying plans, try to remain proactive while you wait,” said Channel. “Use the time and money you’ve already saved to do things like boost your credit score or reduce your other debts. The more you work on strengthening your finances, the less difficult the homebuying process is likely to be.”
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Last updated: Oct. 28, 2021
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