|One of the biggest hurdles to buying a home is getting that 20 percent down payment saved up. It’s a huge sum of money, though admittedly a huge accomplishment when you have enough cash stashed away to finally buy a house.
The problem is that it can be difficult to keep your forward momentum when little expenses continue to pop up. It seems like whenever you add another $1,000 to that house fund, your car breaks down or the dog has to go to the vet. And as long as that big savings fund is sitting around, waiting to be spent, it’s just too easy to dip in and take care of immediate money needs.
Fortunately, there’s a very simple solution, and it comes in the form of a certificate of deposit.
Best Way to Save for a House: A Certificate of Deposit?
The biggest benefits to saving money in a certificate of deposit, or CD, are especially advantageous when you consider the challenges of saving for a home down payment. So if you’re struggling to come up with the best way to save for a house, here’s why you may want to try a CD:
Hands off! CD accounts require that you keep funds on deposit for a set period of time (or else pay a penalty), which is a perfect solution for depositors who have trouble staying out of their easily accessible savings account funds.
Safe and secure. Because saving for a down payment on a house requires setting aside a very large amount of money, you’d be smart not to risk stashing it all under the mattress. A CD account lets you safely store your money in a bank, which offers FDIC insurance for balances up to $250,000 per depositor, per institution.
CD rate interest. It’s easier to meet your savings goals when your money is earning money without any extra work. Granted, even the best CD rates are pretty darn low at the moment, but consider this: Would you rather have a little bit of extra money, or nothing? Thought so.
But of course, saving for a major goal like a house down payment often means adding a little at a time to your overall balance. Setting aside a big chunk of savings in a CD, only to have it sit around for years, isn’t realistic for everyone.
Reverse CD Laddering
Fortunately, MoneyRates.com senior financial analyst Richard Barrington offers a pretty genius strategy for using CDs when saving for a home that allows you to slowly build savings over time while still taking advantage of long-term CD rates.
He calls it a “reverse CD ladder.” If you’ve heard of a CD ladder before, you know that the strategy involves depositing equal amounts of money into CDs of short to long term lengths — from, say, six months out to five years — so that you can take advantage of higher, long-term CD rates but still have an account maturing every six to 12 months in case you need some extra cash.
When applied in the reverse, however, you start by depositing money into a CD that will mature around the time you plan to buy a home (again, we’ll use five years as our example), then as time goes on, you open and fund new accounts that all mature around the same time as the original. As you move closer to that end date, the CDs you open will be of shorter terms. This way, you will still be taking advantage of long-term CD rates while progressively saving and avoiding tying up all your money for several years.
If you decide to incorporate CDs into your house-saving strategy, spend some time shopping around to find the best CD rates. Even if you’re laddering, you don’t have to keep all your money at the same bank or credit union. In fact, depending on how much you have saved, it can even be advisable that you don’t — because FDIC insurance caps out at $250,000, you will need to open accounts at a different institution if you hit that max.
Saving for a home requires a long-term savings approach and a whole lot of patience. Luckily, if you possess both, you’re the perfect candidate for a certificate of deposit.