The best way to save for a down payment

How to save for a down payment
How to save for a down payment

What's the best way to keep savings for a house down payment? Cash loses value from inflation, bonds will drop if interest rates go up, and stocks are risky. --Susan, 31, St. Louis

Coming up with thousands of dollars for a down payment is tough, especially if you're already struggling with obligations like student loans, car payments, rent, and well ... life.

While there are loans that require very little down, most banks are looking for down payments closer to 20%. With the median home price over $200,000, that could mean coming up with $40,000 or more.

What to do with all that cash?

Your time horizon and risk tolerance play a big role on where to keep your down payment savings.

Calculate: What will your mortgage payment be?

Whether becoming a homeowner is a decade out or you're already house hunting, here's where financial planners suggested keeping the funds:

10 years out:

If it's going to be another decade until you plan to buy a home, there's an opportunity to invest the savings and try to grow the money a little before you actually need it.

"This is a great time to get into the market because it's low," said Ellen Jordan, a certified financial planner and senior vice president at Bryn Mawr Trust.

But stocks come with risk.

"You've worked hard to save this money. The last thing you want to see is a drop in value that could prevent you from being able to purchase a home," said Taylor Schulte, certified financial planner and CEO of Define Financial in San Diego.

One way to help minimize the potential risk is to diversify the stocks you invest in. For instance, a couple of index funds or ETFs, which track major stock indexes, could do the trick.

Throwing some bonds into the mix could help temper the risk even more, since bonds are less volatile than stocks.

Jordan suggested a diversified portfolio might look something like this: 50%-60% in stocks and 50%-40% in bonds.

Be sure to pay attention to the maturity dates on the bonds, with none going longer than seven to 10 years, she added.

Related: Should I buy a home while still paying student loans?

Five to seven years out:

At five years out, the money should not be put in stocks, said Jordan.

Here's what she recommended: 50% in longer-term bond funds or individual bonds, 40% in short-term bonds that mature in one to three years and the last 10% in cash.

Keep in mind that if interest rates rise after you purchase a bond, its value falls.

Two to four years out:

Another place to earn some return on your cash is in a certificate of deposit. CDs tend to offer slightly higher interest rates than savings accounts pay. But in exchange, you agree to keep the money in the account for a longer period, or face a penalty if you withdraw sooner.

But interest rates are still pretty low: about 1.5% on a three-year CD.

That's why Schulte recommended putting the money in laddered bonds or CDs to improve the rate of return and also help to mitigate any interest rate risk.

Laddering involves purchasing bonds or CDs with different maturity dates to help offset some of the risk of interest rate fluctuations.

"Given the current environment for CDs and bonds, the risk of tying your capital up for a period of time might outweigh the reward," Schulte said.

Related: There's a big sale on Puerto Rican homes

One year out:

If the plan is to become a homeowner in the next 12 months, the money should be kept completely liquid, the experts recommended. That means you can easily access it at any time.

The best way to do that is in a good old-fashioned savings account, Schulte said. Look for one with a higher yield. In today's low rate environment, that probably means an online-only account like Ally or Synchrony Bank, which currently pay around 1% annually.

Accessing money in online-only savings accounts can take a little longer that traditional banks and some limit how many withdrawals you can make a month, but you should still be able to get all of your money within a couple of days.

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