Saving up for a down payment on a home can have challenges, especially in 2023. However, simply saving money isn't enough to achieve your goal of homeownership. Inflation can erode the value of your savings over time, and as home prices increase, so does the amount needed for a down payment. It's essential to invest your money to earn interest while avoiding any risk of loss, maximize your savings, and keep your timeline for home ownership on track. One great option for achieving this is through a high-yield savings account.
A high-yield savings account is a type of savings account that offers a higher interest rate than a traditional savings account. This type of account is usually offered by online banks or financial institutions and often has no minimum balance requirement or monthly fees. These accounts typically offer a higher annual percentage yield (APY) than traditional savings accounts, meaning your money can earn more interest over time.
For instance, in the chart below, you will notice that traditional banks, such as Chase, Bank of America, and Wells Fargo, offer savings accounts with interest rates between .01% and .15%. In contrast, high-yield savings accounts offered by Barclays, Ally, and Marcus. are between 3.4% and 3.75%. That means using a high-yield savings account will give you a 3,000% better return on your money!
These high-yield savings accounts can offer significantly higher interest rates because of the recent rate hike made by the Federal Reserve. Currently, the Federal Reserve has a target Fed Funds Rate range of 4.5-4.75%. The Fed Funds Rate is the interest rate at which commercial banks borrow money from each other. Interest Rates on savings accounts should follow the same trend as the Fed Funds Rate. Still, many traditional banks have not increased the interest rate they give customers on savings accounts because they believe in their services, such as no ATM fees, free checks, and teller services. High-yield savings accounts that often don't have these services compete for your business by offering significantly higher interest rates.
It's also worth noting that deposits in high-yield savings accounts, like traditional savings accounts, are typically FDIC insured, which means that the federal government guarantees your deposits up to $250,000 per depositor, per insured bank. Being FDIC-insured means that even if the bank fails, your money is safe and protected by the federal government. Before placing your money with a high-yield savings bank or any savings bank, ensure the bank is FDIC insured. Barclays, Ally, and Marcus. are all FDIC insured.
Some traditional banks may try to convince you that a Certificate of Deposit or "CD" is as good as high-yield savings, but a CD requires the customer to lock up their funds for an extended period (often at least a year). The benefit of a high-yield savings account is the ease of access to your funds. Unlike investing in other investment vehicles like CDs, you can access your money anytime without penalties or fees. This flexibility is significant for those close to having enough for their down payment or who want access to their cash for emergencies.
High-yield savings accounts also offer a predictable and consistent return on investment. Unlike the stock market, where there is always a risk of losing money, savings accounts offer a guaranteed return on investment. While the returns may be lower than other investments, the extremely low risk associated with the investment provides a sense of security and peace of mind.
The Fed is expected to raise the Fed Funds Rate at least one more time this year, which means interest rates on high-yield savings accounts could go even higher. If you are currently saving for a down payment and have your money in a traditional savings account, consult your financial adviser and consider moving to a high-yield savings account. You'll be fighting inflation and getting closer to your dream of homeownership. If you'd like to understand how much money you need to save to buy a home within your budget, don't hesitate to contact us at 512.881.5099 or apply now. One of our loan officers will contact you once we receive the application to help you buy a home.
Update as of August 28, 2023: As the Fed Funds Rate continues to rise so does the interest rate being offered on many high-yield savings accounts. For instance, Marcus by Goldman Sachs has increased their interest rate to 4.3%!
