How to save for a home down payment when rates are falling

If you’re looking to buy a home, the Federal Reserve’s recent rate cuts might help lower mortgage rates. However, Fed cuts also impact savings account rates, which could make it harder to grow funds for a down payment, closing costs and other homebuying expenses. 

Yet, you shouldn’t base your down payment savings plan on Fed moves. Instead, focus on your time horizon, not “gaming interest rates,” says Greg McBride, CFA, Bankrate’s chief financial analyst.

“You need to have that money in a safe place without any potential for a penalty at the point when you need it,” McBride says.

Lock in fixed-rate savings ASAP

Savings rates won’t get any better as the Fed continues to issue cuts, so if you’re planning to buy a home in the near future, now’s the time to firm up your savings plan.

Knowing your timeline is key. For example, if you want to buy a home a year from now, don’t park your savings in a certificate of deposit (CD) with a term longer than six months. 

“If your timeline accelerates, you’ll be able to access that money,” McBride says. 

If you find a home but locked up your savings in a longer-term CD, you’d have to eat an early withdrawal penalty to access the funds — or wait until the CD matures and hope the property you want isn’t sold to another buyer.

There is a workaround, though, if you’re set on a CD: a no-penalty CD. This type of CD often comes in slightly unconventional term lengths — think seven or 11 months — and allows you to access your cash penalty-free at any time. 

In many cases, there’s not much tradeoff between no-penalty CD rates and traditional CD rates, either. Ally, for example, recently offered a 4.10 percent, 12-month CD with an early withdrawal penalty equal to 60 days of interest. The bank also offered an 11-month, no-penalty CD at a slightly lower rate, 4.00 percent. 

The other key benefit to a CD: You can calculate exactly how much money you’ll have at maturity. For example, if you’ve already set aside $25,000 in a savings account, you could open a six-month CD with an annual percentage yield (APY) of 4.50 percent and withdraw $556.31 in interest earnings half a year from now. While an extra $556 might not sound like a large amount, that might be enough to cover some of your home closing fees. 

Review other savings options

Locking in a CD rate today helps shield your savings from further rate cuts, but you won’t be able to make additional deposits. That’s where a high-yield savings account comes in. This type of account gives you the flexibility to save more for your down payment at any time (be sure to check your bank’s withdrawal limit policy), but also comes with variable rates.

Consider your everyday spending account, too. One of the best ways to beat falling interest rates is to move your money into a high-yield checking account or a money market account.

Steer clear of risk

If you’ve been following the news on more volatile investments, the thought of earning 4 percent on your down payment savings might not sound like much. The S&P 500’s year-to-date performance has delivered a staggering 27 percent return, while some top-performing cryptocurrencies have surged 200 percent or more. If you’re sitting on what feels like a really small down payment, trying to get in on the action can be tempting.

McBride offers one simple word of advice: Don’t.

“Money in the stock market should be money that you don’t need for seven to ten years,” McBride says. “The money you’re going to need in the next few years needs to be in safe-haven investments such as high-yield savings accounts, short-term CDs and high-quality short-term and medium-term bonds.”

Don’t forget down payment assistance

While many homeowners use savings to buy their first home, you can source your down payment from other places, including a gift from a relative or friend or a down payment assistance program. The latter can be especially helpful if you’re not earning much return from your savings accounts.

Down payment assistance programs are grants and low-interest loans that organizations provide to buyers to put toward their down payment or closing costs. You’ll need to meet the program’s qualifications, and you must typically finance the home with a 30-year, fixed-rate mortgage to receive down payment assistance. 

Down payment assistance is usually only available to first-time homebuyers and low- to moderate-income buyers, with the income threshold based on location. These programs are offered by state and local housing authorities as well as some private lenders.

Bottom line

Savings rates have been trending downward, but there are still ways to maximize savings to buy a home. If you’re stressed about the next potential interest rate movement, McBride recommends tuning out the short-term noise. The difference of a quarter- or half-point of interest on your savings account is a blip in time, especially if you’re focused on applying for a 30-year mortgage.

“Buying a home is a long-term commitment,” McBride says. “If you’re making a small down payment, don’t think you’ll be able to flip it in two or three years to make a profit. It’s going to take several years of paying down the mortgage balance to be able to take anything with you.”