For many people, trying to save enough money for a down payment on a home may feel like an overwhelming task. According to the Federal Reserve, the average sales price of houses sold in the United States was $501,700 in Q2 2024. Meanwhile, the median home down payment was $64,000 during that same period, a 13.4% increase year over year, according to real estate data provider ATTOM.

Trying to save thousands of dollars (often tens of thousands of dollars) for a down payment is a goal that takes time for the average person to accomplish. As a result, it’s important to understand not only how much money you need to save for a down payment, but also the best place to store your cash while you’re working toward this important financial accomplishment.

Where to put savings for a down payment on a house

In general, when you’re saving money for a down payment on a mortgage, you want to keep your cash somewhere relatively accessible. (A long-term investment account, for example, probably doesn’t make sense.)

Yet it’s also important to make sure your cash is earning a competitive interest rate so your savings can grow at the fastest rate possible. And, of course, you want to make sure to store your money somewhere safe so you don’t experience any setbacks that could undo your hard work.

If you’re trying to figure out the best place to store your money when you’re saving for a down payment on a home loan, below are several options you may want to consider.

1. High-yield savings account

Best for savers who value flexibility and competitive interest rates.

Perhaps one of the best options for saving money — for a down payment or other mid- to short-term goals — is a high-yield savings account (HYSA). This is a special type of savings account that earns its name by offering a higher annual percentage yield (APY) compared to standard savings accounts.

At present, some of the best online banks and credit unions offer high-yield savings accounts with interest rates over 10 times higher than the national average. (See our ranking of the 10 best HYSAs here.)

HYSAs also offer you the flexibility to withdraw cash from your savings without penalty when you need to access your money. (Note: Some financial institutions may limit the number of withdrawals you can make per month.) But this easy access could also lead to a temptation to overspend if you’re not careful.

Also, keep in mind that the APYs on high-yield savings accounts are variable. So, if the federal funds rate declines and banks begin to offer customers lower interest rates in response, the interest rate on your HYSA may eventually follow.

2. Certificate of deposit (CD)

Best for savers who want to lock in today’s higher interest rates.

Certificates of deposit, called CDs for short, are another solution you might want to consider if you’re looking for a safe place to store the money you’re saving for a down payment on a home.

Like HYSAs, CDs tend to offer higher interest rates compared to traditional savings accounts. According to the Federal Deposit Insurance Corporation (FDIC), average rates for 1-year CDs were 1.88% as of Sept. 16, 2024 — considerably higher than the average interest rates banks offered on savings accounts at that time (0.46%).

But with a little research, it’s possible to find more competitive CD rates. In fact, the best CDs on the market pay around 4.00-5.00% APY.

Yet attractive interest rates aren’t the only benefit of CDs. Depending on your priorities as a saver, you might also like the fact that most CDs feature fixed interest rates for a set period of time. Therefore, as long as you leave your savings in your account for the duration of the CD term, you can earn a guaranteed amount of interest on your cash.

A downside to consider with CDs is the fact that your money is less accessible. If you withdraw money from your account before your CD matures, you’ll most likely have to pay an early withdrawal penalty. On the other hand, some people like the idea of voluntarily agreeing not to withdraw their savings for the duration of a CD’s term. This arrangement, after all, could be a self-imposed deterrent that keeps you from overspending.

3. Money market account (MMA)

Best for savers who want an account for saving and spending.

If you want a deposit account that gives you the ability to save and spend money in one location while you set aside money for a down payment, a money market account might work for you.

A money market account is somewhat like a cross between a checking account and a savings account. In general, the balance you keep in your account earns interest. But you also may have debit card and check writing capabilities with this type of deposit account.

Some of the best money market accounts offer competitive (variable) interest rates along with other useful features such as no monthly fees (or fee waiver opportunities) and ATM reimbursements. And as long as you choose a financial institution that’s federally insured, your savings are guaranteed up to $250,000 per depositor, per institution, per ownership category if that institution fails.

The biggest risk of keeping down payment funds in an MMA is that you might mix up your spending money with your savings. So, this type of deposit account might not be the best fit for someone who’s working to save a large sum of money for a down payment on a mortgage.

4. First-time home buyer savings account

Best option for savers in eligible states who want tax benefits.

As a first-time home buyer, you may be eligible to open a special type of savings account that not only lets you save for a down payment but might also help you take advantage of state tax deductions depending on where you live. These savings accounts are called first-time home buyer savings accounts, or FHSAs for short.

Contributions to an FHSA are tax-deductible at the state level, meaning you can reduce your taxable income by the amount you save in the account, up to your state’s limit. The interest you earn on the balance may also be tax-free or deferred until withdrawal.

But it’s important to remember that you can usually only spend the money in this account on approved homebuying expenses such as a down payment, closing costs, appraisals, and home inspections. If you use the money in an FHSA for non-approved expenses, you may have to pay taxes on the funds along with possible penalties.

Additionally, there is usually a maximum annual contribution limit, and possibly a lifetime contribution cap, which varies depending on where you live.

At present, FHSA accounts are available to residents of the following states:

• Alabama

• Colorado

• Idaho

• Iowa

• Maryland

• Minnesota

• Mississippi

• Missouri

• Montana

• Oklahoma

• Oregon

• Virginia

Other states are also considering these types of tax-advantaged savings accounts for their residents for the future. Yet even if you live in a state where FHSAs are available, you should talk to a trusted tax professional to see if this type of savings account is a good fit for your personal situation.

5. Individual development account

Best for low-income home buyers.

Trying to figure out how much house you can afford can be complicated, especially as a low-income home buyer. And attempting to save money for a down payment when your budget is tight may be especially challenging.

On a positive note, there are resources available that could help you on your journey to homeownership. An individual development account (IDA), for example, could be a great place to save your down payment funds and perhaps receive some matching dollars along the way.

An IDA is not just a savings account, but a financial tool that aims to help make homeownership (and other financial goals) possible for low- to moderate-income consumers. Not all states offer IDAs, but if there’s a program in your area, you may be eligible for matching funds to help you grow your down payment savings much faster.

In Utah, for example, low-income residents and refugees may receive one dollar for every one dollar they save — up to $4,000 in matched savings — to use for the purchase of a home, a vehicle, to start a small business, or for post-secondary education expenses. There are a variety of IDA programs available throughout the country. However, many of them require 12-36 months to complete. You can find more information about available programs and eligibility requirements by visiting ProsperityNow.org.

Bottom line

The best place to keep your down payment savings may vary depending on your individual goals and your financial situation. No matter what type of deposit account you choose, remember that you’ll want to review options from multiple financial institutions before you move forward.

You may want to search for the bank or credit union that charges the lowest fees and offers the highest interest rates for your chosen account type. It’s also wise to look for extra features that might be useful during your savings journey. Perks such as automated savings, a user-friendly mobile app, savings buckets, and other benefits could make reaching your down payment savings goal easier to accomplish.