Money Market Accounts a Good Fit for Potential Home Buyers

Thinking of buying a home in the next few years? A money market account might be the perfect tool to help you save for a down payment, and then handle the transition to being a homeowner.

Money market accounts have many of the same characteristics as savings accounts, but they offer you more flexibility in the event that you need to start making withdrawals from the account. As a consequence, money market account rates tend to be lower than savings account rates, but they don't cost you that much relative to the flexibility you gain. That flexibility might be key to managing your finances leading up to, and immediately after, your home purchase.

For the purposes of this discussion, consider the term "down payment" to be a catch-all phrase to cover the immediate costs of buying a home. So, this might include the actual down payment plus legal fees, mortgage points, and other expenses.

Using a Money Market Account to Save for a Home

A money market account is a good vehicle for saving up for a down payment for two important reasons:

• Most people save incrementally. If you are blessed with receiving a lump sum from somewhere, then you can be all set with your down payment in one move, but for most people, accumulating enough for a down payment involves a long stretch of disciplined, week-to-week saving. You can turn that savings process into a dress rehearsal for meeting a mortgage payment. Estimate what a monthly mortgage payment might be, subtract what you currently pay in rent, and make sure you set aside at least the remainder in your down payment fund. This will demonstrate that you really would be able to meet that level of mortgage payment every month. If this is your first experience with disciplined saving, though, you might experience some setbacks. You might have to draw on that money, which is where the flexibility of a money market account can come in handy.
• The housing market is unpredictable. Once you've accumulated a decent amount of savings, you might be tempted to reach for a higher yield by locking into a certificate of deposit. However, given how quickly the housing market can fluctuate, you never know if the perfect opportunity might present itself a little sooner than you had planned. The flexibility of a money market account will help you keep your options a little more open.

Your Money Market Account Once You Own a Home

As you transition into the home, the flexibility of a money market account will continue to be useful. Beyond all those closing expenses, you are likely to encounter a series of expenses--both planned and unplanned--once you move in: furniture to buy, rooms to be painted and carpeted, and repairs to be made.

Try to save up a reserve fund above and beyond your down payment and closing costs to prepare for these move-in expenses. Having something with more interest than a checking account, but with a little more flexibility than a savings account, can be a great way to finance the ongoing costs of home ownership.

Source:

Jack Guttentag • Saving for a down payment is a new reality • Oct 11, 2008 • Daily Herald: http://www.dailyherald.com/story/?id=241089