Saving for a down payment on a house is no easy feat.
In some markets, saving up a full 20% down payment can be a huge sum. For big, long-term goals like this, investing might seem like an ideal way to make money grow quickly.
But, investing poses a big problem: risk. Investing your down payment fund isn’t always right, especially if you’re planning to buy in the next few years. Unlike for other long-term goals like retirement, investing isn’t always the right move. Unlike retirement savings, your home down payment savings won’t have decades to recover from short-term market losses.
Whether or not investing your down payment savings is right for you mainly depends on when you want to buy. Here’s how to tell if you should invest your down payment savings, and how to do it.
If you’re planning to buy in the next 2 years, don’t invest
Marcy Keckler, Ameriprise’s vice president of financial advice strategy, previously told Business Insider that your buying time frame determines where you should save. «If someone’s goal is just 18 to 24 months away, consider saving in something that’s really liquid and really low risk,» she said. She suggests a high-yield savings account or money market account — a cash account similar to high-yield savings which keeps money liquid and earns interest — to save for a down payment.
«When you look into the four- or five-year time frame, you certainly might want to get a little more return on the money you already have saved,» Keckler said. But, for anyone wanting to buy in the next two years, a high-yield savings account might be best.
If you know you won’t buy for 2 to 5 years, consider a CD
For anyone who’s not looking to buy in the next two years, low-risk investments are ideal. Even if they don’t yield the highest returns available, it’s better to play it safe with down payment savings.
Keckler suggests opting for lower-risk investments for down payments like CDs, or certificates of deposits. With CDs, money is in an account for a pre-determined term, and generally earns a slightly higher interest rate than it would in a high-yield savings or money market account. While taking money out before the CD ends will incur a penalty, the interest rate won’t change, no matter what happens to the prime rate. When interest rates are falling, CDs could lock in that higher interest rate.
CDs are great for anyone who has more than two years before they buy. Often, the longer your money is committed, the higher interest rate you will earn. Terms often range from one year to five years.
If you have 5 to 10 years before you buy, stocks are an option
Investing in stocks and bonds could be an option for longer-term savers, financial planner Molly Stanifer previously told Business Insider’s Cheryl Lock.
«You can start looking at stocks as a portion of the savings when the time frame is longer than five years,» Stanifer said. If you are thinking long-term, investing this way through a brokerage account could be an option, as your money has a longer time to recover from any changes in the market. Even then, this should only be a part of your savings, she said. Look into lower-risk options like a five-year CD or a high-yield savings account to keep the rest of your savings safe and growing steadily.
While investing down payment savings sounds tempting, it might not always be the best move. Financial planner Michael Anderson previously told Eric Rosenberg for Business Insider that he cautions against it. «If you are trying to save more but see the value drop with your account, it will likely curtail your saving. I have seen people make this mistake,» he said.
Opting for lower-risk investments like CDs or keeping your down payment in a no-risk high-yield savings account are typically the best ways to build down payment savings. «It’s better to give up expected investment return to have the money available when you want to buy your house than to miss out because you invested too aggressively, or your money is not liquid,» Stanifer said.