ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Saving Tips

Tip: Use a High Interest Savings Account to Save for a Home

Updated on January 16, 2011

It is really important that you save up for a house before applying to get a home loan. Doing so allows you to accrue a better down payment. This reduces the amount of money that you need to get on loan, saving you a lot of money in interest charges over the years. One great tip that you should pay attention to is to use a high interest savings account when saving up for your home.

What is a high interest savings account?

As the name suggests, this is a savings account that has a higher rate of interest than a traditional savings account. The high interest account may be in the form of a money market account or a CD. Typically this means that you will be required to leave the money in your account for a certain period of time before you are allowed to withdraw it. For example, you may get a high interest 6-month CD so you would have to wait until the money had been in the bank for 6 months before withdrawing it to use as the down payment on your home.

Why use a high interest savings account when saving for a home

Obviously the core reason to save your money using a high interest savings account is because it means that you’ll be earning more interest on your savings. The more money that you have to put into savings and the longer that you’re willing to save it for, the higher rate of interest you can enjoy. This means that just be keeping your money in the bank you’ll be earning additional money. You don’t need to do anything else except keep saving it there to have additional funds at the end of the loan period.

For example, let’s say that you currently have $10,000 saved up towards the down payment for a home. If you were to invest than in a high interest savings account with an interest rate of 3% compounded monthly over a twelve month period then you would end up with more than $10,300 in total. That means that you’ll have an extra $300 for your down payment after a year of keeping your money in savings.

This savings option makes sense for any type of savings. However, it especially makes sense when saving for a home. That is because saving for a home requires that you save up a large sum of money. That means that you’re going to be saving for an extended period of time. High interest savings accounts have the best return on your investment when you are willing to invest the money over a long period of time. Since you’re already waiting for awhile before using that money, it shouldn’t be particularly inconvenient to put that savings into a high interest account.

Some things to consider

Some of the things that you might want to consider when using a high interest savings account to save for a home include:

o   Length of CD term. It is important that you think about the length of time that you want to keep the money in savings before you use it to buy a home. The longer that you keep your money in the account, the higher rate of interest you may be able to get and the more money you’ll have earned on the savings when it’s time to withdraw from the account. However, you won’t be able to buy your home until that time period is over (because early withdrawal from high interest savings accounts usually incurs a fee). Somewhere between one and five years is usually right for most people who are using a high interest savings account to save for the down payment on the home.

o   You won’t be able to add additional savings to the account. Most high interest accounts don’t allow you to keep making additional deposits into the account during the term period. There are a few ways that you can handle this. One is to look for an account that does allow you to make deposits either regularly or annually. Pay attention to the interest rates, though, as such accounts sometimes don’t offer the highest rates in the market. Another option is to save up periodically and open additional CD accounts. For example, you might open your first CD account as a five-year account. Then you might save for another year and open a second account as a four-year account. Then you would save for another year and open a third account as a three-year account, etc. All of these would be able to be withdrawn at the same time and used for the down payment on your home.

o   You won’t be able to withdraw the money. If you’re just starting out with saving for a down payment on a home then you may not be sure how stable your finances are going to be. This can make it scary for you to consider using a savings account that doesn’t allow you to withdraw your money. If you are too wary of this option then consider using a no-fee CD or a high interest checking account as an alternative. You won’t get as high of an interest rate on your investment but you will have the option of withdrawing the money as needed. Of course, every time that you do withdraw that money, you’re taking away from the amount of money that you have for the down payment on your home. That’s just something to be aware of.

How much money do you hope to save up for the down payment on your home?


Submit a Comment

  • amymarie_5 profile image

    amymarie_5 7 years ago from Chicago IL

    Thanks, you answered all my questions.

  • amybradley77 profile image

    amybradley77 7 years ago

    I already knew this, but good to here again. You make it much more easy to understand here too. Good work. A.B.