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The Best Savings Accounts for First-Time Home Buyers

Nicki & Karen » December 9, 2019

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If you’re thinking of purchasing a home for the first time, you may have access to a Home Buyer Savings Account. This is a special savings account that allows you to save for a future home purchase. Likely the most beneficial aspect of this savings account is that the account is tax-advantaged. The funds that you end up placing in this account can be used for the closing costs and down payment of the first home that you buy.

While you will be required to prove that you have used these funds for approved purposes when buying a home, the main advantage of using a home buyer savings account is that this money can’t be taxed, which isn’t available with other types of savings accounts. If you use the money correctly, it can be subtracted from your taxable income when you go to file your tax return. The following article offers a look at what Home Buyer Savings Accounts are and the many different savings accounts available to you as a first-time home buyer.

What is a First Time Home Buyer Savings Account?

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A Home Buyer Savings Account is unique in that it’s only available to first-time buyers. This type of account allows you to effectively save up for the down payment and closing costs of your first home without needing to pay taxes on these funds. If you maintain one of these savings accounts for five years and place $6,000 into it every year, this money won’t be taxed as long as you use the funds for the correct purposes.

Since you don’t need to pay taxes on this money, you will likely be more interested in placing your funds into this account. It allows you to save money for your future home while avoiding paying taxes on some of your income in the interim. The closing costs that can be covered with a Home Buyer Savings Account include underwriting fees, escrow fees, and origination fees. Before you use this type of account, it’s important that you understand exactly how it works.

How Do First Time Home Buyer Savings Accounts Work

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In order to obtain an FHSA account, you can either open a savings account at a bank or label your current savings account as an FHSA. The account will continue to act just like a standard savings account. However, the tax authorities in your state will receive information pertaining to this account to make sure that you are using it correctly. Most states require that you fill out a separate tax form related to this account with your yearly state taxes, which will exempt all of the funds in your account from being taxed.

If you select a high-yield savings account, you can earn compound interest that adds to the amount you’ve already deposited into the account, which allows you to earn even more money for your eventual down payment and closing costs. This process is very simple and straightforward. However, it’s important that you never use the funds for a purpose that isn’t qualified. If you do, the remaining funds will be taxed, and you will receive a withdrawal penalty that can be anywhere from 5-10 percent of the amount that you need to remove from the account.

Best Savings Accounts for First Time Home Buyers

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1. Goldman Sachs

APY: 1.70 percent
Monthly fees: $0
Minimum to open: $0
Benefits for first-time home buyers: The main benefits of using this savings account is that you don’t need to pay anything to open the account. There are also no transaction fees or monthly fees that you will be required to pay while you maintain the account. The 1.70 percent APY is also relatively high.

Website: https://www.marcus.com/us/en/faqs

2. Barclays

APY: 1.80 percent
Monthly fees: $0
Minimum to open: $0
Benefits for first-time home buyers: The main benefits derived from using the Barclays savings account is that this account has a high 1.80 percent APY along with $0 monthly fees and $0 to open the account. If you don’t have sufficient funds, they charge $5 instead of the standard $30 charged by most other savings accounts.

Website: https://www.banking.barclaysus.com/online-savings.html

3. CIT Bank

APY: 1.90 percent
Monthly fees: While there are no standard monthly fees, you will need to make a $100 deposit each month to obtain the 1.90 percent APY. This APY will also be available with a balance in your account of at least $25,000.
Minimum to open: $100
Benefits for first-time home buyers: Along with the high APY and low minimum-to-open requirements, first-time buyers will also benefit from obtaining a $300 bonus when creating the account.

Website: https://cit.com/cit-bank/savings-builder-account-bonus-direct/

4. American Express

APY: 1.75 percent
Monthly fees: $0
Minimum to open: $1
Benefits for first-time home buyers: The primary benefits of this savings account for home buyers include competitive rates, no monthly fees, and the ability to link your other accounts at American Express to the savings account.

Website: https://www.americanexpress.com/personalsavings/high-yield-savings-account.html

5. Capital One

APY: 1.80 percent
Monthly fees: $0
Minimum to open: $0
Benefits for first-time home buyers: Home buyers benefit from high rates, no fees, fantastic short-term CD options, and a comprehensive tool that allows you to track your savings goals.

Website: https://www.capitalone.com/bank/savings-accounts/online-performance-savings-account/

6. Discover

APY: 1.80 percent
Monthly fees: $0
Minimum to open: $0
Benefits for first-time home buyers: This account is great for people who already use Discover. Along with the savings account that you have access to, Discover is one of the few banks that provides customers with access to CDs, money market accounts, and checking accounts. The $0 minimum-to-open requirements make it easy to use this account without making a substantial commitment.

Website: https://www.discover.com/online-banking/savings-account/

7. Citibank

APY: 2.05 percent
Monthly fees: $4.50, which can be waived if you have a balance in your savings account of at least $500.
Minimum to open: $0
Benefits for first-time home buyers: The main benefits that come with opening a savings account at Citibank include a very high APY, no minimum balance, and the ability to use a bank that has a large national presence.

Website: https://online.citi.com/US/ag/banking/citi-accelerate-savings

8. HSBC Direct

APY: 2.05 percent
Monthly fees: $0
Minimum to open: $1
Benefits for first-time home buyers: When you open an HSBC Direct savings account, the primary benefits of doing so include a great APY no matter what your balance is, $0 maintenance fees, and the ability to make withdrawals and deposits at an HSBC retail location.

Website: https://www.hsbcdirect.com/savings/

9. Ally Bank

APY: 1.70 percent
Monthly fees: $0
Minimum to open: $0
Benefits for first-time home buyers: When you open a savings account at Ally Bank, you’ll also be provided with a free checking account, $0 monthly fees, and customer service that’s available on a 24/7 basis.

Website: https://www.ally.com/bank/online-savings-account/

10. Synchrony Bank

APY: 1.80 percent
Monthly fees: $0
Minimum to open: $0
Benefits for first-time home buyers: As a first-time home buyer, this type of savings account is beneficial because of its high APY, $0 monthly fees, and $0 minimum-to-open requirement. You will also be reimbursed by $5 each month for usage of any out-of-network ATM machines.

Website: https://www.synchronybank.com/

11. Vio Bank

APY: 2.07 percent
Monthly fees: $0
Minimum to open: $100
Benefits for first-time home buyers: While Vio Bank does require a $100 deposit to open, you’ll benefit from $0 monthly fees and a 2.07 APY that’s among the highest you can find. If you want the highest returns for the money that you deposit into your savings account, you should consider the high-yield savings account at Vio Bank.

Website: https://www.viobank.com/online-savings-account

How Compound Interest Can Boost Your Down Payment Savings

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When you use a high-yield savings account for your eventual home-buying needs, the primary benefit of this type of account is that you will gain compound interest, which will enhance your down payment savings. Compound interest allows you to gain money over time with the initial money that you deposited into your savings account. This interest is calculated based on the principal of the account as well as any interest that has been accrued in the past, which means that your interest will increase over time.

If you have a two percent APY and a balance of $1,000 in your savings account, your account will have $1,020 inside of it by the end of the year. However, this only takes simple interest into account. Since compound interest also includes any accumulated interest in its calculations, you should earn even more every year. Depending on the savings account, interest can be compounded every day, every month, or every quarter. If your interest is compounded daily with a two percent APY, your savings account should have $1,020.38 in it by the end of the year.

Although this doesn’t seem like much of a difference, it can add up over a period of 5-10 years. If you want to make a large down payment on your home, compound interest is advantageous solely because it provides you with more money to place within the down payment, which can help you obtain a better loan with lower interest rates.

Choosing the Best Savings Account for First Time Home Buyers

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The best savings account for you all depends on what you want out of a savings account. As touched upon previously, these accounts come with different monthly fees, benefits, and annual percentage yields. If you expect to be placing money in this savings account for several years and want high returns on the money that you invest, the best savings account for you may be one that offers a high APY. Some savings accounts will provide an APY without requiring you to put much or any money into the savings account before the APY kicks in. On the other hand, certain savings accounts require minimum balance that can be as high as $5,000 before the APY kicks in, which could be disadvantageous to you.

You should also consider all of the benefits mentioned previously. For instance, the Vio Bank savings account for first-time home buyers comes with high APY rates, no monthly fees, and a small requirement of $100 to open. By comparing the benefits of each service, you should be able to find a savings account that aligns with your needs. Once you have found the savings account that you prefer, all that’s left is to open an account at the bank in question.

While the application process can differ depending on the bank that you choose, most online banks provide simple applications forms that will allow you to sign up for a Home Buyer Savings Account in next to no time. Keep in mind that you will have to enter some personal information as well as debit card or bank account info if you want to make a deposit into the savings account.

If you have already been using one of these savings accounts or find that you have enough money for your down payment and closing costs, contact our team at Nicki & Karen Southern California Real Estate today to start searching for your first Southern California dream home!

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