Buying a home is the biggest purchase most people make. And, if you’re planning to finance the purchase of your home, you’ll need a large down payment – ideally up to 20% of the purchase price to avoid the additional cost of private mortgage insurance (PMI).
Unless you already have the cash on hand, you need to save some money over time for the down payment. But where should you save your money?
Many people save money in their checking or savings account, but if you want to increase your earning potential, without sacrificing the security of FDIC insurance, consider saving your money in an account. high yield savings.
Opening a high yield savings account online is easy. You can compare the savings rates of multiple banks all in one place in the Credible Market.
CAN YOU BUY A HOUSE WITH LESS THAN 20% DOWN?
How Much Money Should You Have in Savings Before Buying a Home?
At a minimum, you’ll need to save enough money for a down payment, which can range from 3.5% of the purchase price for a government-backed FHA loan to 20% for a conventional mortgage.
Another expense you’ll need to save for is closing costs, which cover real estate transfer taxes, mortgage taxes, appraisal fees, title insurance, and other fees. Closing costs are typically between 2% and 2.25% of the purchase price of the home. This means that the closing costs on the median US home price of $ 313,000 would be between $ 6,260 and $ 7,042.50.
Your lender may also require that you have enough cash after closing to make mortgage payments for the first few months. So if you estimate your mortgage payment, including principal interest, taxes, and insurance, at $ 1,500 per month, you should save an additional $ 3,000 to account for the first two mortgage payments.
Before you apply for a mortgage, you may find it helpful to calculate the numbers using an online mortgage calculator like Credible to determine your potential monthly payments.
USING A SAVINGS ACCOUNT FOR A DEPOSIT AT HOME IS A SMART MOVEMENT
How to choose a high yield savings account
Here are some of the main factors to consider when shopping for a high yield savings account:
1. Interest rate. Recent FDIC data lists the national average interest rate on savings accounts at 0.04% APY, which takes into account both average and jumbo deposits over $ 100,000. Traditional brick and mortar banks are the worst off, often offering 0.01% APY on their savings accounts.
Per contract, your money can earn up to 0.90% per year in a high yield account. Explore Credible to discover online savings account options that could earn you more money.
SIGNING UP FOR A HIGH RETURN SAVINGS ACCOUNT: A STEP-BY-STEP GUIDE
2. Fees, Restrictions and Requirements. High savings rates are a great advantage, but not if they are offset by excessive fees. Be sure to read the fine print to make sure that transaction fees, overdraft fees, monthly fees, or maintenance fees won’t wipe out your income. Other factors to consider are the account conditions and requirements imposed by some banks, such as minimum balances or transaction limits, as well as a minimum opening deposit.
3. Insurance. Before signing up for an account, make sure the bank is insured by the FDIC or the National Credit Union Administration (NCUA). This will protect your account savings – up to $ 250,000 – if the bank goes down for whatever reason.
How to use a high yield savings account?
Here are some of the best reasons to put your money in a high yield online savings account:
- Emergency savings. Having an emergency fund can help you deal with unforeseen expenses or tough economic times like the one we are experiencing right now. A high yield savings account is insured up to $ 250,000, so you can rest assured that your money is safe and that you can access your money quickly when needed.
- Short term savings. If you’re saving for a short-term goal within a year or two, like a new car or a family vacation, consider putting your money in a high interest savings account that offers a high rate of return instead. of a current account. . Don’t make the mistake of locking your money in a Certificate of Deposit (CD) as it can be difficult to access your money when you need to put down a down payment on a house. When you’re ready to buy a home, the last thing you want to think about is the early withdrawal penalty that comes with most CDs.
- Big expenses. Your money will earn more with compound interest in a high yield savings account thanks to savings rates. The higher return on your money can give you a big boost when saving for a large purchase, like a down payment on a home. You need all the breaks you can get when saving for a major purchase, like a home.
Are High Yield Savings Accounts Worth It?
High yield online savings accounts are often viewed as a low risk option for saving for a short term goal. They offer both the security of federal insurance to protect your money and a significantly higher savings rate than a traditional savings or checking account.
The main advantage of high yield savings accounts is the considerably higher APY rates than traditional savings accounts, often 10 to 20 times higher than some online banks. If you don’t need a physical location for your savings, online savings institutions might be your best option.
Visit Credible to learn more about saving for a down payment. You can explore your home loan options to see how much money you need to put on a mortgage.
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