Buying a Home? Best Ways to Save Your Down Payment

If you're ready to buy a home, you'll need enough down payment money to qualify for a mortgage. Find out how much you need, six tips to save faster, and the best places to stash cash for your new home. 

Laura Adams, MBA
7-minute read
Episode #455

Saving Tip #3: Save your tax refunds and gifts

Don’t forget that windfalls like tax refunds, cash gifts, or inheritances give you the perfect opportunity to save for a down payment on your next home.

Savings Tips #4 Start a side hustle for extra income

Sometimes you need to get serious about creating additional income in order to save enough for a down payment.

Consider how you can use your skills to provide a service—like tutoring, website maintenance, or giving music lessons—and bring in quick money to set aside. Or you could find a part-time or seasonal job that fits into your full-time work schedule.  

Saving Tip #5: Save your old car payment

If you paid off your car loan or are close to it, resist the urge to buy another one. Keep your car and save an amount equal to the payment for your down payment.

Saving Tip #6: Tap your IRA

The rules for a traditional or Roth IRA allow you to tap up to $10,000 to buy or build your first home, without having to pay a 10% early withdrawal penalty.

The rules for a traditional or Roth IRA allow you to tap up to $10,000 to buy or build your first home, without having to pay a 10% early withdrawal penalty.

But there are downsides to taking an early distribution from any type of retirement account. One is that you’ll owe federal and state income tax on any distributions that were not previously taxed.

Another con is that you set back your progress on retirement savings, which is more important in the long run than becoming a homeowner.

Also see: How to Buy a Home in 10 Steps

Best Places to Save a Down Payment When Buying a Home

Once you begin saving money for a house down payment, you’ll probably get a little anxious about where to keep it. You might be tempted to invest it with the hope of turbocharging its growth.

Unless your target date to buy a home is more than 5 years down the road, I don’t recommending putting your down payment savings at any investment risk. As you know, the financial markets are volatile in the short term, which means you could lose all or a significant portion of your money right before you need it.  

What about certificates of deposit or CDs? They may offer a slightly higher rate than savings or money market account, but you give up liquidity. Your money is locked up for the term of a CD, such as 6 months, one year, or more.

The fact is that getting a tenth of a percent more interest doesn’t make it worth it—unless you’re absolutely positive you won’t need the money before a CD’s maturity date. Otherwise you’ll pay a penalty to cash out sooner.


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.