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• The first step in figuring out your down payment is asking what you can afford to pay per month.
• High-yield savings accounts, CDs, and I Bonds are good options depending on how soon you want to buy.
• It might make sense to reduce your retirement savings contributions while saving for a down payment.

One of the biggest hurdles that prospective first-time home buyers face is saving for a down payment. While many aim for at least a 20% down payment, higher housing prices have made it harder to know how much to save.

If you aren’t sure what to aim for, figure out your ideal monthly mortgage payment, then back into how much of a down payment you will need.

While it typically takes a while to save up for a down payment, you could reach your goal sooner with a solid savings plan. As a financial planner, I have seven creative ways to save for a first home down payment.

1. Take advantage of a first-time home buyer IRA withdrawal

First-time home buyers may be eligible to withdraw up to $10,000 from a traditional IRA without incurring the usual 10% early withdrawal penalty.

However, keep in mind that the withdrawal is still subject to federal and state/local income tax. It is also important to note that these withdrawal rules and tax implications only apply to a traditional IRA. Roth IRAs have a separate set of withdrawal rules.

2. Automate monthly contributions to a high-yield savings account

One of the easiest ways to grow your home down payment is to save in a high-yield savings account. Currently, many high-yield savings accounts are offering 4% to 5% or higher.

In addition, these accounts provide liquidity and safety, as they are FDIC-insured. Set up automatic transfers from your checking account to this high-yield savings account.

3. Consider ways to reduce current rent

One of the biggest hurdles that can get in the way of saving for a home down payment is expensive rent. Reducing rent can be challenging since it is influenced by a multitude of factors such as the rental market in your area.

However, there are a few strategies that you can consider to reduce your rent costs such as finding a roommate, moving in with family members, or negotiating lease renewal increases with your landlord.

4. Use a CD laddering strategy

CDs are a type of savings account that require you to lock your money away for a predetermined period, typically anywhere from six months to five years. Using a CD ladder gives you safety, some liquidity, and higher interest rates.

Just remember that there is typically an early withdrawal penalty for withdrawing funds before the CD’s maturity date.

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5. Consider I Bonds as a long-term option

If your time horizon is greater than one year, I Bonds could be a great option. An individual may purchase up to $10,000 in electronic I bonds, and up to $5,000 in paper I bonds (with your tax refund) per calendar year. This government-issued savings bond is a very safe option as you won’t lose your principle. Another great benefit of I Bonds is that the interest payments are state and local income-tax free.

Keep in mind that you must leave your cash in I Bonds for at least one year before you can make a withdrawal. Also, if you cash in the bond in less than five years, you lose the last three months of interest. The current rate for I bonds issued November 1, 2023 to April 30, 2024 is 5.27%.

6. Consider temporarily reducing your retirement plan contributions

Depending on your specific situation, it may make sense to consider temporarily prioritizing your down payment over retirement plan contributions.

If you decide to temporarily scale back your contributions, make sure that you take advantage of any employer match first.

However, remember that reducing your contributions may impact your ability to take advantage of tax benefits and compound interest.

7. Transfer high-interest debt to a balance transfer card

By transferring your debt to a balance transfer credit card, you can achieve a 0% APR for a certain period of time. This allows you to pay down your debt faster, saving you in interest.

By paying down your debt faster, you may be able to improve your credit score and debt-to-income ratio. This will make you more attractive to lenders and potentially qualify you for more favorable terms and get a lower interest rate on your mortgage.