Lately, it seems like it's never a good time to buy a house. It is, however, a fantastic time to save for a down payment.
The homebuying frenzy that ensued in 2020 and 2021 thanks to record-low mortgage rates is long over. The shift was swift and dramatic, caused by the Federal Reserve's aggressive rate hikes as it battled inflation. Now, buyers confront mortgage rates not seen since the early aughts — and, as a result, must come to grips with their diminished purchasing power.
On the bright side, the very same rate hikes have resulted in much higher yields on savings accounts. If you're interested in buying a home in the next few years, you can use this to boost your down-payment fund. Below, Select breaks down how you can take advantage of the current high-interest environment if you're planning to buy a house in the near future.
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How high rates can help you save for a home while making buying one harder
If you had hoped to own a home in the next few years, you might feel that your prospects are getting bleak.
There's no saying when (or if) mortgage rates will fall back to the 3% range. The limited inventory has also kept home prices from really dropping off after they soared to terrifying heights during the homebuying binge. It's no wonder that home sales have been on a consistent decline — housing unaffordability is a dreadful turnoff.
Consider this: Let's say you want your monthly payment to be around $1,700 and are saving to put 20% down. In 2021, you could get a mortgage rate of around 3%, depending on your credit and overall financial circumstances. In this situation, you could afford a $400,000 home. But now that the rates hover at about 7%, you can only get a $280,000 house in the same scenario.
But while the Fed's decision to raise rates has caused mortgage costs to swell, it's also bolstered the rates on most financial products — including savings products.
Currently, you can find high-yield savings accounts and CDs with an APY of 4% and higher. Even better, interest compounds on these types of accounts, meaning you earn interest on interest, not just the money you deposit.
UFB Secure Savings
Annual Percentage Yield (APY)
Up to 5.25% APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to 0.20% APY on savings
Minimum balance
$0, no minimum deposit or balance needed for savings
Fees
No monthly maintenance or service fees
Overdraft fee
Overdraft fees may be charged, according to the terms; overdraft protection available
ATM access
Free ATM card with unlimited withdrawals
Maximum transactions
6 per month; terms apply
Terms apply.
Read our UFB Secure Savings review.
How to pick between high-yield savings accounts and CDs
High-yield savings accounts
High-yield savings accounts grant you the advantages of accessibility and liquidity. If your goal is to buy a house in less than a year, these will be important to you as you might need access to funds quickly. With this type of account, you can easily withdraw money whenever you want, but by law, you can only do so six times per month before incurring fees or even having your account closed
Conversely, you can add money to your account as many times as you want. This is helpful if you're at the very beginning of the saving process and don't have a big lump sum of cash ready to deposit. You can open an account with the funds you have and then add to your savings at regular intervals in the future. Your money will keep earning interest and bring you that much closer to your goal of making your down payment.
Synchrony Bank High Yield Savings
Annual Percentage Yield (APY)
4.75% APY
Minimum balance
None
Monthly fee
None
Maximum transactions
Up to 6 free withdrawals or transfers per statement cycle
Excessive transactions fee
None
Overdraft fee
None
Offer checking account?
No
Offer ATM card?
Yes
Terms apply.
One caveat: APYs on existing savings accounts aren't set in stone and fluctuate depending on what the Fed is up to. If we've learned anything about the economy during the last few years, it's that nobody can predict the future. Interest rates have been on a rollercoaster ride since 2020 and one can only speculate how long they'll stay suspended at this high point.
Read more: The best high-yield savings accounts
CDs
Rates on existing CDs, on the other hand, typically remain the same for their entire term. This makes CDs an excellent choice in a high-rate environment when you've already saved up some money and have between one and five years to let it grow.
Usually, you can't add more money to a regular CD beyond the initial deposit. Unless you're willing to shop for a different type of CD, such as an add-on CD, or you open additional CDs later, you're stuck earning interest from that first contribution. You also generally can't withdraw any money without penalty until your CD matures, so make sure you're truly prepared to have these funds locked away for a long period.
Remember that it doesn't have to be one or the other. When it makes sense, you can always combine high-yield savings accounts and CDs to maximize your down payment saving strategy. For instance, if you have a few years before your planned house purchase but have already saved up a significant sum, you can lock most of it in a CD to take advantage of the current high rates. Then, you can put the rest of the money in a high-yield savings account and continue to add to your savings. You get the best of both worlds — the flexibility of a high-yield savings account and the security of a CD.
Bottom line
As mortgage rates made their way into the stratosphere, they have left hopeful homebuyers with rising anxiety and sinking purchasing power. Fortunately, savings rates have also increased, making it a little easier to save for a down payment. High-yield savings accounts offer you a lot of liquidity, but CDs guarantee you'll enjoy today's high rates into the future. Evaluate your situation to determine which kind of savings vehicle will work best for you and watch your down payment fund grow — courtesy of the Fed's rate hikes.
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Information about the Synchrony Bank High Yield Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.