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Banking

Why right now is a perfect time to save for a down payment

Rising interest rates have made buying a home harder — and saving for a down payment easier.

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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

UFB Secure Savings is offered by Axos Bank, a Member FDIC.
  • Annual Percentage Yield (APY)

    Earn up to 5.25% APY

  • Minimum balance

    None

  • Monthly fee

    None

  • Maximum transactions

    No max number of transactions; max transfer amounts may apply

  • Excessive transactions fee

    None

  • Overdraft fee

    Overdraft fees may be charged, according to the terms, but a specific amount is not specified; overdraft protection service available

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes

  • Terms apply.

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

Synchrony Bank is a Member FDIC.
  • 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. 

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.

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.
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