Forget CDs. If You're Saving for a Home, Your Money Should Go Here

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In July, the median U.S. home sale price was $422,600, according to the National Association of Realtors. Even if you're not putting down 20% on a home, you might still have to come up with a large sum of money at closing. You need to keep that money in the right place while you're accumulating it.

You may be eager to put your home down payment into a CD to take advantage of today's outstanding CD rates . But here's why putting your down payment funds into a CD could sorely backfire on you.

CDs are too restrictive

The nice thing about putting money into a CD is that you get a guaranteed interest rate. Also, you're likely to get a higher interest rate than what a savings account might pay you.

Despite these benefits, a CD is the wrong home for your down payment for one big reason. There can be steep penalties for cashing out a CD before its maturity date. And since your home-buying plans can change, you're better off not locking your money up in a CD and taking that risk.

Let's say you're trying to save up $30,000 as a down payment on a home. You're 50% of the way there, but you also don't expect to come up with the remaining $15,000 for another 14 months or so.

You might think you're OK to put the $15,000 you do have into a 12-month CD so you can earn a bit more interest on that money. But what if you get a huge bonus at work this December that makes it so you have your full down payment by March? Suddenly, you're in a position to buy a home during the spring of 2025, in theory -- only you can't get your money out without a penalty until next fall.

Also, while we know what home prices look like today, it's hard to know what they'll look like in six months or so from now as mortgage rates fall, which they're expected to do. You may be able to get away with a smaller down payment. But if you tie that money up in a CD, you'll risk a penalty for accessing it.

Even if home prices don't fall, you never know when a true bargain might hit the market. Maybe a seller in your target neighborhood needs to move immediately for a job. Maybe a couple is getting divorced and needs to sell right away, so they're offering their home at a price that's below market value for a quick sale. These things can happen, so it's important to make sure your down payment funds are available to you at all times.

Stick to a savings account

It's not easy to save up a home down payment. It's natural that you'd want to grow your money faster by opening a CD and snagging a higher interest rate.

That's a move that could come back to bite you, though. So if you're saving for a home, you may want to play it safe and stick to a savings account. You might earn a bit less interest, but you'll enjoy a lot more peace of mind.

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