Saving for a down payment on a house? Here is how and where to save.

There are a number of hurdles on the pathway to becoming a homeowner, but for many people, one of the first and particularly daunting challenges is the down payment.

Even if you are getting a mortgage, it’s still necessary to put this cash amount down upfront, and the recommended amount — 20% — is steep, especially given the high cost of housing. But if you can work backward from that figure and break it down into smaller steps, plus employ some tricks to make saving up a little easier, it is more than possible to get there.

How can you figure out how much to save?

Saving for a down payment can feel like a totally amorphous goal until you get more specific about it. So, how can you figure out what a reasonable amount to save is — especially before you have found the house you are going to buy?

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Start by figuring out how much house you can afford to buy in your current financial situation. There are a number of rules of thumb you can use to decide this, but “probably the best-known metric” is the 28/36 rule, which “involves putting no more than 28% of your gross monthly income toward housing expenses and 36% toward overall debt,” said CNBC Select.

Once you have that upper limit in mind, determine what percentage of the amount you would like to save for a down payment. To avoid paying private mortgage insurance (PMI), you will need to put down at least 20%. However, it is not mandatory to do so — in fact, “in 2024, down payments for first-timers averaged 9%,” said CNBC Select.

What can you do to help save up?

First off, it is helpful to set a clear timeline for when you would like to start making moves toward homeownership. This will allow you to more easily see how much you need to save each month.

From there, evaluate your monthly budget, considering how much is coming in and how much is going out. Could you take steps to increase your income, whether that is by asking for a raise or picking up extra work? Alternatively, upon reviewing your expenses, identify some areas where you could tighten up or cut back.

Another shortcut to saving is to divert any “windfalls in the form of tax refunds, insurance payouts, inheritances and so on, which could put you significantly closer to your goal,” said Investopedia.

Where should you stash your down payment savings?

Where you put that money you are saving up can also make a difference in reaching your goal, thanks to the power of interest. Some options to consider include:

High-yield savings accounts: High-yield savings accounts can work for those “who value flexibility and competitive interest rates,” as they allow you to withdraw your funds without penalty (up to a limit), said Yahoo Finance. “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.”

Certificates of deposit (CDs): CDs can make sense “once you have a good-sized chunk of savings,” as you effectively lock up the funds for a certain amount of time, though at a “slightly higher rate than savings accounts or money markets,” said NerdWallet. Just make sure to have your CD’s maturity “timed to mature around the time you expect to have the bulk of your down payment saved” and ready to go.

Money market accounts: A money market account can provide a little bit of the best of both the above options. They “may offer higher rates than standard savings accounts,” but you will have a bit more flexibility to withdraw the funds in case you need to than you do with a CD, said Bankrate.