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With mortgage rates near their highest level in two decades, you may be holding off on a home purchase in hopes that rates will come down a bit. So where should you stash your down payment money in the meantime?
Fortunately, it's an excellent time to hold money in the bank, as interest rates are also at historic highs. In fact, you can easily earn at least 5.00% APY on your down payment funds, potentially even as much as 5.75% APY with one of today's record deposit rates.
Because mortgage rates change daily and vary widely by lender, it's smart to follow the current rates and trends and always shop around for your best rate.
Not Sure When You'll Buy? Try a High-Yield Savings Account
If you don't know how soon you'll jump on a house opportunity, you'll need to keep your money fully accessible. High-yield savings accounts offer this feature, allowing you to make deposits and withdrawals whenever you like. But an account calling itself "high-yield" doesn't mean it's offering a truly competitive rate, so always be sure to shop around.
We make the research easy, as every weekday we post our ranking of the 15 best savings account rates that are available to anyone in the country. The current nation-leading rate is an eye-popping 5.25% APY, which is available from either Milli or the Evergreen Bank Group, with plenty of additional options in our list to earn above 5.00% APY.
Compare that to the national average savings account rate of 0.42% APY and you can see that you stand to earn quite a bit more by putting your down payment money in a top-paying savings account. For instance, holding $25,000 in an account paying 5.25% APY will earn you more than $105 per month in interest. Meanwhile, an account offering the national average of 0.42% on the same amount won't even pay you $9 a month.
To keep things risk-free, just make sure the high-yield savings account you open is at either a bank that's insured by the Federal Deposit Insurance Corporation (FDIC) or a credit union insured by the National Credit Union Administration (NCUA). By sticking to member institutions of these two federal agencies, your deposits (up to $250,000) will be protected in the unlikely event that the bank or credit union fails.
Money Market Accounts Could Pay Even More
Another option that keeps your money liquid—meaning accessible whenever you want it—is a money market account. Traditionally, money market accounts were offered to banking customers who could keep a large balance in the account, and the rates tended to be higher than what the bank paid on savings accounts.
But times have changed, given the rise in popularity of high-yield savings account. To compete, many money market accounts have low minimum balance requirements, or even no minimum at all. And while sometimes the top money market rate is higher than the top high-yield savings account rate, it can go either way.
Once again, we do the rate research for you, as every morning we publish our ranking of the 15 best money market accounts. At this time, you can earn just slightly less with the nation's top money market account. It pays 5.21% APY and is available from Republic Bank of Chicago.
One added feature you can get with a money market account is the ability to write checks. So if you find this feature useful, seek out one of the best-paying money market accounts. Otherwise just choose whichever account type offers you the highest APY with account requirements that fit your needs. Also, as with savings accounts, be sure the bank or credit union offering the account is an FDIC or NCUA member to keep your deposit safe from any risk.
The rates on savings and money market accounts are variable, meaning they can change at any time, and the bank or credit union does not need to give you any advance notice of a rate change. That means any time U.S. interest rates are falling, the APY on your savings or money market account will almost surely be reduced as well.
Think You Won't Buy a House for a While? Consider a CD
If you're pretty confident you won't buy a home for at least three months, you can earn even more interest by investing all or some of your down payment in a high-paying certificate of deposit (CD). The upside is that interest rates on CDs ranging from three months up to two years are currently paying more—sometimes substantially so—than the very best high-yield savings and money market accounts.
In fact, today's leading rate on a nationally available CD is a remarkable 5.75% APY, which is available for a 9-month term. But you have a lot more choices than that, as our daily ranking of the best CD rates includes more than 20 certificates paying at least 5.50% APY across a variety of durations.
The downside, however, is that putting your funds in a CD requires committing to keep the funds there for the full length of the CD term you choose. If something comes up and you need the money early, it's not impossible to withdraw. But you'll be hit with an early withdrawal penalty that will reduce your earnings. You can shop around to make sure the CD you choose has a mild penalty policy instead of a harsh one, but your best bet is to be able to keep the funds in the CD until it matures. So choose your CD term carefully based on the earliest date you think you'll want to make your down payment.
Just as with savings and money market accounts, opening a CD with an FDIC-insured bank or NCUA-insured credit union will protect your funds in case the institution fails, making CDs virtually risk-free.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rates of almost 100 banks and credit unions that offer savings accounts to customers nationwide, using that data to determine daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the savings account's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best high-yield savings accounts, read our full methodology.
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August 10, 2023 at 04:03AM
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