Saving up to buy a house can feel like it takes forever. Week by week, you slowly add to your nest egg, trying to accrue enough to cover the down payment, closing costs, and any other expenses, not to mention making sure you have enough of a cushion that your home purchase won’t totally deplete your savings. It can be a long and time-consuming process. You might wonder if there’s any way to build your savings faster — and the good news is, yes, it’s possible! There are a number of investments to save for a house that can help pump up your savings account, as well as higher-yield options, which might mean you’ll be able to buy that dream home sooner than later.
We’ve investigated the ins and outs of investments to save for a house, to include everything from your garden-variety bank offerings to riskier ventures like the stock market, as well as talking to both investment experts and real estate professionals who are in the know. While you probably won’t find any “get rich quick” methods here, we did uncover a few ways to maximize your savings and potentially help your money grow.
Let’s break it down and see what might work for you when it comes to investing to save for a house!
Investments via your bank or credit union
If you have a regular savings account through your bank, you probably already know that interest rates on these kinds of accounts are relatively dismal, and you won’t make much more than a few pennies per year in interest, at best. However, a savings account, even one that doesn’t earn much interest, does still benefit you as a homebuyer.
New Mexico agent Valerie Almanzar, who has more than 15 years’ experience in real estate, says that buyers should remember that while regular savings accounts don’t net much interest, just the act of saving helps them qualify to buy a home, as lenders want to see that track record.
“People need to have a history of saving,” she says. “Any kind of savings account will show that history.”
If you want to get a little more bang for your buck, however, there are other accounts that have slightly higher interest rates and might be worth checking out.
High-yield savings accounts
High-yield savings accounts have a comparatively higher interest rate than other savings accounts, averaging about 0.50%, as opposed to around 0.01% for a regular savings account.
Most banks offer high-yield savings accounts, and they aren’t difficult to sign up for, but they often have minimum balance requirements, which means you only get that higher interest rate if you maintain a specific balance in your account. These accounts typically also limit the number of transactions (which could include deposits, transfers, and withdrawals) you can make each month. Some banks may also require a minimum initial deposit amount.
Ryan Inman, president of Physician Wealth Services, a financial planning company for physician families, says that he often recommends high-yield savings accounts for clients who want a shorter-term investment.
“When talking to my clients, I’m basically looking at how fast they’ll need the money,” he says.
“If they are looking at buying a home in, say, two years, a high-yield savings account works really well.”
Those saving to buy a house should keep in mind, however, that an interest rate of 1% still isn’t much (although it’s definitely better than a regular savings account). For example, if you deposit $100 into a high yield savings with an interest rate of 0.50%, it will net a whopping 50 cents in interest per year.
Money market accounts are similar to high-yield savings accounts and are also available through most financial institutions. The difference between the two usually has to do with minimum balance requirements and number of allowed withdrawals.
Like high-yield savings accounts, monthly transactions are usually limited, part of the Federal Reserve’s “Regulation D,” which imposes transaction restrictions on certain kinds of savings accounts. Money market accounts also often require a higher initial deposit, and you have to maintain that balance in order to maintain the interest rate.
While standard interest rates for money market accounts aren’t much higher than a regular savings account, some banks offer “relationship rates,” which means you get a better interest rate if you have more than one account at that bank. Online-only banks also tend to have higher rates, offering upwards of 0.50% for some money market accounts.
Like a high-yield savings account, you can get a decent return on money market accounts; it all depends on how much you deposit and how long you leave the money invested.
Certificate of Deposit (CD)
A Certificate of Deposit, or CD, is a type of savings account that requires you to leave the money in the account for a specific amount of time, usually anywhere between six months and five years. A minimum deposit is required, and you cannot withdraw the money until the CD matures — with some stiff penalties if you take the money out early.
Interest rates tend to fall between 0.50% and 0.70%, depending on how much you deposit and the term of the CD. Once the CD matures, you’ll have the opportunity to renew it, or to withdraw your money along with the accrued interest.
CDs can be a good option if you’re often tempted to dip into your savings, but they can be restrictive if you think you might be ready to buy before the CD matures. As far as returns, a recent example from Forbes shows that based on an interest rate of 0.55%, a one-year CD with a value of $500 could earn as much as $138.
Because the interest rates aren’t much better than with high-yield savings accounts, and because the terms are so strict, Inman says he doesn’t typically recommend CDs to his clients. “Interest rates are still low on CDs,” he says. “I would stay away from them as they just don’t earn enough.”
You’re probably familiar with the cash-back and points rewards that go with most credit cards, but some checking accounts offer them, too. These kinds of accounts often have higher-yield interest rates, along with added perks like cash back, airline miles, or cash bonuses when you initially open the account.
You can sign up for a rewards checking account just like you would a regular checking or savings account, but you’ll want to make sure you can meet all of their requirements in order to make the most of the account. A rewards checking account may require specific balance limits, a minimum number of debit transactions per month, and the use of online banking, as well as charging monthly fees if you don’t adhere to these requirements.
Annual percentage yield for rewards checking accounts can vary from between 1% and 3%, depending on the bank and its terms.
Other types of investments
Outside of the various savings and checking accounts offered by your financial institution, there are other methods of saving money for buyers who want higher-yield investments.
Treasury bonds and Treasury bills
A Treasury bond, or savings bond, is a certificate purchased from the U.S. Treasury, which you keep for a certain number of years as it accrues interest. Once it matures, you can cash it in, getting back your initial investment, plus interest.
Bonds can be purchased at your bank, or you can use the Treasury’s online service, TreasuryDirect. Savings bonds are a safe, albeit slow, way to save; based on when you purchase them, they don’t mature for 20 to 30 years. As far as returns go, you’re guaranteed to get back the original value of the bond, and, depending on when you purchased it, the accrued interest.
Treasury bills, or T-bills, are similar, but have much shorter terms, with a max of 52 weeks. They are usually sold at a discount, which is known as par value, or face value. When they mature, the difference between the current value and par value is your interest.
Investors are often attracted to T-bills because while the interest accrued on them is taxed at a federal level, they are exempt from state and local taxes. Like savings bonds, your return can vary based on when you buy and the terms of the bill.
A 401(k) is an employer-supported retirement account in which you put a percentage of your paycheck into diversified investments. The minimum amount you can contribute is usually about 3%, and employers will often match your contribution up to a certain amount. 401(k)s are considered a relatively safe investment, and they also offer some tax benefits.
While you can’t withdraw from a 401(k) until age 59 and six months (at least not without a huge penalty), you can borrow against your 401(k) to buy a home. Plans usually have a limit of 50% of the value of the account, and you have to pay it back within a certain amount of time.
The interest you pay for a 401(k) loan is usually much less than for a consumer loan, but buyers should keep in mind that it also adds another monthly payment, which can affect debt-to-income ratios when qualifying for a mortgage.
An IRA (individual retirement account) is intended as a retirement savings account, allowing you to invest money while either deferring taxes (such as with a traditional IRA) or paying the taxes as you save and being able to withdraw the money tax-free at retirement (such as with a Roth IRA).
IRAs grow by way of investments within the account, which generates compounded interest as those investments earn dividends. Depending on the type of IRA you choose, you can contribute up to a certain amount each year, and it becomes accessible at age 59 and six months.
Like a 401(k), you can borrow against your IRA for a home purchase, but many financial experts, Inman included, are against it.
Some buyers might also be tempted to cash out their retirement accounts altogether, taking the penalty in order to buy a house, but this is often a big mistake.
“Initially, it might seem like you are getting a good chunk of change,” says Almanzar, “but then you’re hit with penalties and taxes that, depending on the type of investment account, could cost you up to 40% of your money.”
Fintech, or financial technology, relates to all the new tech options out there that help consumers and businesses manage their money. This can include things like Bitcoin; digital shopping programs that offer small, immediate loans rather than using a credit card; mobile stock trading; and virtual lending institutions.
Fintech investing and saving platforms such as Betterment and Acorns offer apps that can be downloaded to phones or computers for quick, easy access, essentially cutting out the “middle person” of traditional financial advisors. These are sometimes called robo-advisors, as portfolios are created and managed via automated data.
Novice investors tend to like these kinds of platforms, as they usually require a very small initial deposit (Betterment requires a deposit of only $10 to get started), and their fees tend to be much lower than a brick-and-mortar investment firm. You also don’t usually have to worry about penalties when you decide to move money to different accounts or withdraw it.
The downside to this kind of automated investing is that you don’t get a customized investment plan, nor do you get the human interaction that goes with that. And the money you invest isn’t guaranteed to grow; it all depends on how you invest it and the current rates of return.
Do you like to gamble? If so, investing in stocks might appeal to you.
The stock market involves the practice of buying and selling shares of publicly owned companies. You buy stock, preferably when the company is new and shares are inexpensive, then sell it down the line when the company’s stock goes up in value.
While buying stock and selling it for a big return does happen, big losses also happen, and investing your house savings fund into the stock market isn’t usually recommended.
“You never know what the market will do in the short term,” says Inman. “You could easily lose 20% to 30% of your investment.” He adds that while we can’t know what the stock market will do when trying to do quick-turnaround investments, it is possible to estimate returns over the long term, so holding out and not selling too soon provides a higher chance of a decent return.
There’s something to be said for the old adage of not putting all of your eggs in one basket. Diversifying your savings by putting a certain amount in (for example) a high-yield savings account while also setting up a money market account and dipping a pinky toe into the stock market, can help balance your overall savings plan.
A diversified investment portfolio through a financial planner is also a good way to save, as you’ll be somewhat protected from any short-term financial fallout during economic highs and lows. Keep in mind, however, that when you diversify, all or part of your money might not be available to you when you need it.
You can also look at diversifying your income, whether you pick up a side job, start your own small business, or even rent space in your house to generate some additional earnings.
Other tips and advice from the experts
If you’ve been saving and still don’t have quite enough money, don’t give up. Almanzar reminds buyers that there are programs out there, especially for first-time homebuyers, that can offer loans or grants to help pay for closing costs.
“Here in New Mexico, there are some really amazing programs, depending on the client’s circumstances and phase of life,” she says. She also suggests that buyers who aren’t able to save a lot seek out loan programs that require smaller down payments, such as FHA loans, which require a minimum of only 3.5% down.
Inman adds that people need to keep their eye on the big picture when it comes to saving.
“People get caught up on this treadmill of trying to figure out how to make more money, rather than just saving traditionally,” he says. “They’re looking for a quick fix when in reality, if they spend 30 more minutes a week on their finances, they could probably learn how to save more.”
Finding the right way to save for a house definitely depends on your individual situation, and talking to someone who has expertise in the field is always a good place to start. A financial advisor, along with a top real estate agent, can help you decide on the best investments to save for a house and give you insight into how to make your money grow.
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