It really depends on your situation.
Buying a home is challenging these days -- namely because home prices are up on a national level. That means if your goal is to make a 20% down payment, you'll need to save up a lot more cash than you would've needed a few years ago.
If you're in the process of saving for a home, you may be eager to expedite things so you can stop renting and start owning as soon as possible. And you may be inclined to do what you can to earn a higher return on your money to achieve that goal.
Now, one thing you should know is that investing your home down payment funds in a brokerage account is generally not a great idea. When you invest, you run the risk of losing money, which could hinder your home-buying plans rather than make them a reality sooner.
But what about CDs? The upside of putting money into a CD is that you'll generally snag a higher interest rate on your cash than you will in a regular savings account.
But is locking up your home down payment funds in a CD a wise idea? Or will it backfire on you?
How soon do you think you'll need that cash?
The benefit of saving in a CD is scoring a higher interest rate on your cash. But in exchange for that higher rate, you're making a commitment to keeping your money tied up for a preset period of time. And if you cash out a CD before it comes due, you'll risk being penalized to the tune of a few months of interest. That could be a huge setback if you're trying to meet a big financial goal, like buying a home.
That's why locking up your down payment funds in a CD can be risky. If you open a CD and then want to make an offer on a home before it comes due, you'll risk being penalized -- or, you'll end up having to delay your home purchase to avoid a penalty, thereby potentially missing out on a huge opportunity.
With that said, keeping your home down payment funds in a CD isn't necessarily a bad idea. But it really depends on where you are in the savings process.
Let's say you're hoping to save $50,000 to make a 20% down payment on a $250,000 home. If you've been saving for a year and have accumulated $15,000 so far, that's great progress. But it also means you're probably not looking at buying a home this year. So in that case, if you were to put your $15,000 into a 12-month CD, you might snag a better interest rate on your money without taking on a ton of risk.
But let's say you've amassed $40,000 of the $50,000 you're aiming for. If so, there's a chance you'll have enough cash to put down on a home at some point within the next year. And so you probably don't want to limit your options or open yourself up to penalties by opening a CD.
A regular savings account is not a bad choice
You might earn more money in a CD than a savings account. But savings accounts today are actually paying pretty generously. So if the idea of putting down payment funds into a CD just doesn't sit well with you, don't do it. Instead, stick to a regular savings account, which won't impose restrictions and will give you full access to your money at any time.
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FAQs
So is it worth it? The bottom line is, you're probably going to get a better ROI by putting your down payment money into a CD. This means it could be worth doing, as long as you're 100% sure you won't need the money until the end of the term.
Should I put money in a CD to save for a house? ›
Instead, put it in a high-yield savings account or money market account. If you want to be extra disciplined, you can put your money in a certificate of deposit (CD,) but you need to be mindful of early withdrawal penalties should you need your money sooner than the maturity date.
Is putting money in a CD smart? ›
You can earn money without the risk of losing any through certificate of deposit (CD) investing. CDs may not be the most exciting investments, but it's their safety and predictability that make them attractive. Consider adding CD investing to your portfolio, whether you're a risky investor or a conservative one.
What is the biggest negative of putting your money in a CD? ›
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 2.62% | $265.17 |
| 18 months | 2.24% | $341.38 |
| 2 years | 2.09% | $426.48 |
| 3 years | 1.95% | $601.95 |
3 more rowsJun 14, 2024
Saving for Your Down Payment in a CD Is a Good Idea. If you're less than three years away from purchasing a home, then your savings should be kept in a high yield savings account, CD, or treasuries — all of which are safe investment options that have low risk, says Kendall Meade, certified financial planner at SoFi.
What is a good amount of money to put in a CD? ›
While that amount will be different for everyone, you should keep a few things in mind. First, a minimum amount is usually required. Most CDs have a minimum deposit between $500 and $2,500, though some can be lower or higher than this range.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Should I lock in a CD now or wait? ›
How CDs work. Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Is it better to put money in a 401k or a CD? ›
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
What happens to CD if the bank closes? ›
CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency. If you have multiple CDs across different member banks, each will be protected up to that limit.
Why is a CD a poor investment? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
Do you pay taxes on CDs? ›
Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Should I put a million dollars in a CD? ›
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Can you get 6% on a CD? ›
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
Where should I put my money if I'm saving for a house? ›
For those planning to purchase a home within the next 3 years, Fidelity suggests holding down payment cash in checking, regular savings, or high-yield savings accounts—or in cash-like investments such as money market funds or certificates of deposit (CDs) that will mature before you anticipate needing the money.
What is the best investment to save for a house? ›
High-Yield Savings and Money Market Accounts: A traditional way to save for a house is through savings accounts, specifically high-yield savings or money market accounts. These offer higher rates compared to regular savings accounts, helping your money grow faster.
Is it better to put money in a CD or savings? ›
If your goal is to lock in a high rate of interest on funds you don't need to access for a period of time, a CD might be your best option. However, a high-yield savings account may be the better choice if you want to earn solid interest on your savings while still keeping the money relatively accessible.
What is the best savings account for a house? ›
So you might want to look at a longer term savings account which pays you more interest. Opening a Lifetime ISA (LISA) if you're a first-time buyer under 40 could give you a 25% boost on your savings.
