First-Time Buyers Week

Is there one right way to save for a down payment?

By Virginia K. Smith  | April 6, 2017 - 11:59AM

If you've even done some casual research into buying real estate for the first time, you're likely all too aware that the biggest obstacle facing most first-time buyers is come up with the down payment. And if you're working aggressively to build the tens (or hundreds) of thousands of dollars needed, this leads to a natural follow-up question: How should you be saving?

The simplest course is to get into the habit of saving a healthy portion of every paycheck, regardless of where or how you choose to save it. "It is typically the easiest to automatically set up automatic deposits from payroll to go straight into some type of savings so a borrower is not forced to make transfers themselves," advises Robbie Gendels of National Cooperative Bank (fyi, a Brick sponsor). But while there are some high-yield savings account options out there (NerdWallet has a helpful roundup of current options), even those won't net you much more than one percent interest on your money, so you'll be sacrificing the potential to let your money grow along with the market.

You'll need your funds to be liquid at some point in the near-ish future, so it's better not to put your down payment savings in your retirement funds, which could face heavy tax penalties if you want to withdraw the money before, well, retirement.

If you opt for investing, however, you'll be risking potential losses, and may also have to pay taxes when it comes time to liquidate your assets. "There's no tax efficient way to save for a down payment on a house," says accountant Jonathan Medows. "The bottom line is that if you want to make money, you're going to have to pay taxes on it, and handle the inherent risk and volatility."

Still, Blanton notes that clients frequently do liquidate investments to come up with the down payment, and Citi Habitats agent Jana Angelakis suggests consulting with an investment advisor who knows how to be smart and aggressive. "f you're young, the market will go up and down, but long term, it's always up." If you don't plan on buying for a number of years, you and your financial advisor can devise, for instance, a strategy that can help you get to your down payment goals within a decade, which would likely look different from the strategy you'd deploy for your retirement savings.

Within the investment realm, it's generally considered safer to invest in index funds (which pull from a pool of diversified investment options) than individual stocks, and you can also consider safer but lower-yield options such as money market accounts (which are like savings account, but with higher minimum deposit requirements, more restrictions on withdrawals, and higher interest rates), or Certificates of Deposit (in which you agree to keep your money saved in the account for a set period time, usually with a longer time frame correlating to a higher interest rate).

But ultimately, there's no one right way to game the system to save significantly smarter or faster than other buyers. Instead, it comes down to how flexible you want your cash to be, your time frame for the purchase, and your tolerance for potential losses in investments. "It depends on the person, and your tolerance for risk," says Medows. "Investing is great when things are going up, but when some of these funds go down, you're kind of screwed."

Whether you decide you'd rather invest, save, or a mix of both, we've got a roundup here of apps and services that will help you work towards your goals.


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