Money Management

A larger down payment could shrink your mortgage payments, but there’s a downside to consider, too. Read on to learn more. 

There was a time not so long ago when mortgages were fairly inexpensive. But today’s mortgage rates look very different than the mortgage rates borrowers were seeing two or three years ago.

The average mortgage rate as of this writing is 6.96% for a 30-year loan, according to Freddie Mac. And so given where rates are today, you may be tempted to make a larger down payment on your home if you have the cash.

Doing so could lower your monthly payments on your mortgage and save you money on interest over time. But while increasing your down payment might seem like a good idea in theory, when you run the numbers, there may be a better option for your extra money.

Investing your money could make more sense

It made sense for buyers to make lower down payments on the homes they bought in 2020 and 2021, since money was so cheap to borrow. These days, that’s not the case, seeing as how the average 30-year mortgage rate is roughly 7%. But while that is a lot of interest to pay on a home loan, you should know that over time, the stock market’s return has been higher.

Over the past 50 years, the stock market has delivered an average annual return of 10% before inflation, as measured by the performance of the S&P 500. As such, while putting extra money into your home might save you from paying 7% on that sum, you could end up denying yourself the opportunity to earn 10% instead.

Let’s say you buy a $300,000 home and put down 20%, or $60,000, on a 30-year fixed mortgage at 7%. Ultimately, you’ll end up spending $334,590 on interest. If you put an extra $20,000 down when you make your home purchase, you’ll cut your total interest to $306,711. That’s a savings of $27,879.

But let’s say you invest your extra $20,000 for 30 years at a 10% yearly return. At the end of that window, you’ll end up with about $349,000, or $329,000 profit. So which would you rather do — save about $28,000, or make almost $230,000?

Bigger isn’t always better

Tempting as it may be to make a larger down payment on your home given today’s mortgage rates, that’s not necessarily the best choice. Plus, when you make a larger down payment, you tie up more money in your home.

Stocks are fairly easy to liquidate. If you buy stocks and need cash down the line, you can sell them pretty much on the spot.

But selling a home is a far more complicated process. And while you could always opt to sell off some of your stocks when a need for money arises, you can’t exactly sell off a portion of your house to free up cash and keep the rest.

For these reasons, you may want to stick to a smaller down payment. It’s best to put down 20% on your home to avoid having to pay for private mortgage insurance. But you may not want to push yourself to go beyond that.

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There may come a point when your savings are emptied. Read on to see what to do if a need for money arises. 

Having an emergency fund could spare you the cost and stress of racking up debt when a need for money arises out of the blue. But the money in your savings account might eventually run out on you. Or, it might quickly run out if you encounter a major home repair issue or another large expense.

But what if your emergency savings run out and you need money before you’ve had a chance to rebuild? At that point, borrowing might be your only option. But there’s one route that may be less financially painful than others.

A personal loan could come to your rescue

You might start with an $8,000 emergency fund only to have to spend that entire sum to replace your car’s transmission. If you then run into a $5,000 home repair a few months later, you may have no choice but to borrow to cover it.

At first, whipping out your credit card might seem like the best solution. But a personal loan could be a better choice for a couple of reasons.

First, the interest rate on your personal loan may be considerably lower than what a credit card will charge you. And also, that interest rate will generally be fixed.

With a credit card, your interest rate may be variable, and that could easily drive up the cost of your monthly payments over time. But with a personal loan, you get the benefit of fixed, predictable monthly payments. And having those could make it easier to not only keep up with your debt but figure out a budget that allows you to work on replenishing your emergency fund at the same time.

Plus, personal loans are extremely flexible in that they can be used for any purpose. You could even take one out to consolidate credit card debt.

Is a personal loan the right choice for you?

If you’re out of emergency savings and own a home, borrowing against it might cost less from an interest rate perspective than signing a personal loan. But if you don’t have a home of your own, then a personal loan could be a cost-effective option, provided you have good credit.

Personal loans are unsecured, so they’re not tied to a specific asset that can be used as collateral. As such, the lenders that write these loans take on a fair amount of risk.

But the higher your credit score, the less risky a borrower you are to a lender. And that could result in an interest rate that makes your loan affordable.

As of the first quarter of 2023, U.S. personal loan balances had risen to $225 billion, according to data from TransUnion. So clearly, they’re a pretty popular borrowing option. And so while it’s always more ideal to dip into savings to cover an unplanned bill than to borrow for one, if your cash reserves have been depleted, it could make sense to shop around for a personal loan to cover the expense you’re suddenly saddled with.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Savings accounts are all the same, right? Keep reading to learn about one feature you won’t want to pass up when you open a new savings account. 

Savings accounts aren’t exactly sexy, but having one is an important part of managing your finances. You need a place to keep the cash you’re saving for near-term goals, like a nice vacation next year, or buying a house the year after that. And you absolutely need a home for your emergency fund that won’t require you to jump through hoops to reach that money. What’s the point of having an emergency fund if you can’t access it when an unplanned bill pops up?

Savings accounts are fairly straightforward, as bank accounts go. But you certainly have options when it comes to picking one. I opened a savings account with an online-only bank last spring, and as my financial situation has improved since then, I’ve come to appreciate one feature of it more and more. I recommend you look for a savings account that comes with the option to create sub-savings accounts.

This feature makes it easy to save for multiple goals

Depending on the savings account you choose, this nifty feature might go by a different name. Some banks call them “buckets,” “pockets,” or “vaults.” But it all comes to the same: With this feature, you can save for separate goals within the same bank account. And if you’ve opted for a high-yield savings account with an online-only bank, you get to earn the same high rate of interest on the entire account, no matter how many goals you’re saving for separately.

My high-yield savings account lets me set up dated goals within each of the separate sub-accounts, and I get a congratulatory email whenever I reach a goal. (Most recently, this was for the sub-account I created to save money for an upcoming staycation.)

I can also easily move money around between the sub-accounts, and it’s easy to tell what percentage of my total balance is represented by each. And if I want to transfer money out of the account altogether, I can specify which sub-account it should come from. Since I also save for my quarterly freelance tax payments and have to drain this sub-account four times a year, this is a great function indeed.

Should you just open more than one savings account?

Of course, you don’t have to opt for a savings account with this feature. Instead, you might decide to just open multiple savings accounts, and there’s nothing wrong with that either. Online savings accounts are quick and easy to open, and if you don’t mind spending more time keeping track of separate accounts, this could be a good move for you.

In fact, if you have money you want easy access to (such as an emergency fund), it might make sense to put it into a savings account linked to your checking account, as that will allow you to move money back and forth quickly when you need to. One pitfall of keeping the bulk of my savings at a different bank from the one I use for checking is that while I can transfer money from checking at one bank to savings at the other very quickly, it takes a whole day to move it back in the other direction.

Other features of the best savings accounts

Here are a few other things to look for when you’re choosing the best savings account for you.

No monthly maintenance fees: Why should you pay for the privilege of keeping your money at a certain bank? Many online-only banks have done away with fees altogether, and even if your bank charges them, look at the rules for your account to see how to get them waived. This could mean maintaining a certain minimum balance in the account or arranging for a regular transfer from your checking.Easy access to your money: Many savings accounts don’t come with an ATM card, but you should still be able to get your money when you need it. In the case of my savings account, I ended up opening a checking account linked to it so I could get a debit/ATM card.FDIC insurance: It is vital to keep your money with a bank that is FDIC insured. In the event of a bank failure, up to $250,000 of your money is protected in a savings account and will be returned to you.High APY: I saved the best feature for last. Thanks to this high interest rate environment we’ve been experiencing, savings accounts are paying generous interest right now. My savings account was just bumped to an APY of 4.25%, and there are other accounts out there paying more.

Never underestimate the utility of a good savings account. It might not make you weak in the knees, but it’s an important way to keep your money safe — and you might get to take advantage of some pretty sweet features, too.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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