When my wife and I bought our first home we were still expecting our oldest child.  Fast forward eight years and we now have three kids, two cats, and a dog.  Our once cozy two-bedroom home is now just ready to burst at the seams.   Needless to say we’re looking to move into a new home that will be a bit larger and give us a little more room.

Our goal is to keep our monthly mortgage payment as low as possible.  Historically low interest rates will certainly be a help, but we’re also trying to save as much money as possible to put towards a down payment on our new home.  The more we can be saving for a down payment, the less we have to finance and the lower our monthly payment will be.

Of course the question arises of where to keep the money we are planning to use for a down payment.  When considering our options were two main factors that we looked for.

First we looked for liquidity.  Since we’re looking to buy a new home within the next 6 months to a year we need to keep our down payment money where we can get at it quickly.  It doesn’t make sense to put it somewhere that is too inaccessible, or someplace where it would incur penalty fees if withdrawn too soon.

The other factor we needed to be sure of was stability. We weren’t interested in investing our down payment money for the long term.  We merely wanted a safe place to keep it until we needed it.  Any earnings on those funds would be considered a bonus.

These rules should apply not just to down payment savings, but for anything for which you will need to access the funds within the next 2 or 3 years (or up to 5 years if you want to be conservative).  The goal should not be to squeeze out the greatest return.  Instead you should be focused on preserving the principal and earning some interest as safely as possible.  Remember there is a difference between saving and investing.  Just imagine if you were keeping all your down payment savings in stocks and the market crashed just as you were getting ready to buy a house.  You may suddenly find yourself short of the amount needed to buy your dream home.

So forget about keeping your down payment savings in the stock market.  Instead focus on FDIC insured money market accounts, interest-bearing checking accounts, short term certificates of deposit, or high yield savings accounts.  These options all provide the liquidity and stability you need for short term savings.

In the end we chose to open up an ING savings account for our down payment money.  We already have several accounts with ING so it was easy enough to open one more and keep all of our online savings accounts together.  The interest rate is better than you’ll find in offline banks.   Plus I’m able to set up automatic transfers directly from our checking account to keep our down payment fund growing.

Where do you keep your short term savings?