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CFPs weigh in: Here's the best place to put your money when saving for a house

Setting aside funds for a down payment on a home? Put that cash in an accessible savings account.

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Due to record-low interest rates and quarantine measures that kept people isolated inside, Americans in 2020 bought the most homes they have since the 2006 housing bubble.

Though interest rates on mortgages have recently gone up since the start of 2021, they still remain near historic lows. Those looking to take advantage of the low rates may want to buy now. Others who are waiting it out a bit should take this time to find the right savings account to store their down payment fund.

Money earmarked for a big investment, such as a house, should be kept in a savings account where it can grow while also still being protected through FDIC insurance. Soon-to-be homeowners should avoid investing their down payment money unless homeownership is a far-off goal in the distant future.

Select spoke with two certified financial planners about their advice.

The best place to save for a down payment

Lauryn Williams, a Texas-based CFP and founder of Worth Winning, suggests putting your cash into any type of savings account. Ideally, choose one offering a higher interest rate than your traditional savings or checking account.

Examples include a high-yield savings or money market account. Though savings rates are lower across the board when compared to stock market returns, these types of savings accounts can still earn you much more than the national 0.04% or 0.03% average Annual Percentage Yields (APY) on savings and interest-bearing checking accounts, respectively.

With a money market account, users still get a few checking account features, such as check-writing privileges, debit cards and ATM access. Savings accounts, on the other hand, are not set up for making very many withdrawals and transactions, but you can still access the cash should you ever need it.

Select analyzed and compared dozens of savings accounts offered by online and brick-and-mortar banks, including large credit unions. Below are our top-rated high-yield savings accounts and money market accounts. They each offer interest rates higher than the national average, plus they are all FDIC-insured and have $0 monthly maintenance fees and require $0 minimum deposits to open an account.

What not to do with your down payment savings

Because of the risk that comes with putting your money in the market, do not invest that cash you are stockpiling to buy a home in four years or less, suggests Douglas Boneparth, a New York City-based CFP, president of Bone Fide Wealth and co-author of The Millennial Money Fix.

"If you have a little more time on your side or are OK with losing some money, you could consider a very low-risk investment portfolio, but there's no guarantee," Boneparth adds.

The stock market offers the potential for much higher returns than the interest you'd earn in a savings account. The average stock market return has historically hovered around 8% per year, while annual percentage yields on high-yield savings accounts in the recent past reach just over 2% at best.

But Williams points to the last year as an example of how volatile investing can be: The sharp decline in the S&P 500 (an index that reflects the overall U.S. stock market) back in February and March 2020 at the onset of the pandemic was unprecedented — and a decline we hadn't experienced since the stock market crash of 1929 during the Great Depression. Trading platform Robinhood points out that it took just 22 trading days for the S&P 500 to drop 30% (from Feb. 19 to March 20, 2020).

"Imagine you have been saving up $100,000 over the last five years to get ready for a down payment," Williams says. "You decided to do this in an investment account. You find the perfect home and then...Covid hits. Overnight, your $100,000 turned into $60,000. Now, you have to either lock in losses to use the remainder to purchase your home or wait for the market to bounce back to purchase."

Bottom line

Knowing your timeline for buying a house will help you determine where you should be putting your money to save for a future down payment. If it's in the short-term (four years or less), keep that money in a FDIC-insured savings account that earns above-average interest and lets you access it should you need to.

For those homeowners-to-be planning further out into the future, you may consider taking on slightly more risk by investing that money in the market to potentially earn a higher return. If you know home ownership is one of your goals, talk to a trusted financial planner well ahead of time, or just stick to a savings account to keep things simple.

Information about Marcus by Goldman Sachs High Yield Online Savings has been collected independently by Select and has not been reviewed or provided by the banks prior to publication. Goldman Sachs Bank USA is a Member FDIC.

*American Express National Bank is a Member FDIC

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.