A down payment is savings with a deadline and a hard floor: the money has to be there, in full, in the weeks around a closing date that you only partly control. That makes the usual investing logic of riding out a slump over many years a poor fit. The approach below works backward from your purchase window, puts each part of the money in an account that matures or stays liquid in time, and shows with dated market data why a stock fund is the wrong place for cash you plan to spend within about three years. A worked timeline follows the money from today to closing.
How much cash will you need at closing?
More than the down payment itself: closing costs typically add 2% to 5% of the price, and you will want cash left over after you move in.
The benchmarks come from the Consumer Financial Protection Bureau's page on determining your down payment. Most loans need at least 3% down, many lenders want 5% or more, buyers often save money at 10% and save the most at 20%. Lenders tend to price loans in 5% steps, so 8% down usually buys no better terms than 5%. On a conventional loan, putting down less than 20% generally means paying private mortgage insurance, which protects the lender, not you.
For a $350,000 home, with closing costs at an illustrative 3% and $2,500 for moving and setup:
| Down payment | Down payment amount | Closing costs at 3% | Moving and setup | Cash to have ready |
|---|---|---|---|---|
| 3% | $10,500 | $10,500 | $2,500 | $23,500 |
| 5% | $17,500 | $10,500 | $2,500 | $30,500 |
| 10% | $35,000 | $10,500 | $2,500 | $48,000 |
| 20% | $70,000 | $10,500 | $2,500 | $83,000 |
The CFPB also suggests subtracting an emergency cushion of at least three to six months of expenses before deciding what you can put down. That cushion is separate money; how much emergency fund covers sizing it.
Which accounts fit each part of the timeline?
Match each dollar to when it will leave: savings for anything due within weeks, and CDs or Treasury bills for money with a known later date.
| Money and when it leaves | Where it can sit | Why |
|---|---|---|
| Earnest money, due days after an accepted offer | High-yield savings or a money market deposit account | It has to move within a day or two |
| Purchase likely within six months | Savings, a government money market fund, or 4- to 13-week bills | Closing dates slip, so flexibility matters most |
| Purchase in 6 to 12 months | 26- or 52-week bills, or CDs maturing before the window opens | Locks a rate until the window |
| Purchase in one to three years | 52-week bills rolled once, 1- or 2-year CDs, or a 2-year Treasury note maturing before the window | A fixed rate with no stock market exposure |
| Cushion after closing | Savings | Repairs and surprises in the first months |
Compare rates before choosing between banks and Treasuries. On October 30, 2026 the 52-week bill yielded 4.36% and the 2-year Treasury note about 4.56%, while the FDIC's national averages for 12- and 24-month CDs were 1.76% and 1.55%. Individual banks and brokered CDs often pay far more than those averages, so the comparison has to use real offers. Treasury interest escapes state income tax as well; T-bills vs high-yield savings and T-bills vs CDs work through both comparisons.
Why are stocks risky for a one-to-three-year goal?
Because a stock index can fall 20% or more within months and take years to recover, shrinking a down payment just when you need it.
The S&P 500's own record shows how quickly that happens. Using daily closing levels from FRED, which exclude dividends:
| Decline | Peak | Low | Fall | Back above the old peak |
|---|---|---|---|---|
| 2022 | 4,796.56 on January 3, 2022 | 3,577.03 on October 12, 2022 | −25.4% | January 19, 2024 |
| 2025 | 6,144.15 on February 19, 2025 | 4,982.77 on April 8, 2025 | −18.9% | June 27, 2025 |
The 2025 drop recovered within months; the 2022 drop took two years. Nobody knew in advance which kind it would be, and that uncertainty is the problem for a buyer with a date.
Worked example: A stock-fund down payment in 2022
A buyer puts $24,000 into an S&P 500 index fund on January 3, 2022, planning to buy that autumn. At the October 12 low, the price-only value is $24,000 × 3,577.03 ÷ 4,796.56 = $17,897.98, about $6,102 short. The fund was not back above $24,000 until January 2024.
A buyer who had $70,000 ready for 20% down on a $350,000 home would have seen it fall to $70,000 × 3,577.03 ÷ 4,796.56 = $52,202.43, or 14.9% of the price. That is below the 20% down payment at which a conventional loan stops requiring private mortgage insurance, so the loss would raise the cost of the mortgage too.
Dividends would have softened these losses slightly, and the index has since climbed far above both lows, closing at 7,743.98 on October 28, 2026. The lesson is about timing, not direction: over one to three years, nobody can say where a stock fund will be on closing day. Current figures are on the SPY data page, and bear markets and corrections puts declines like these in context.
What does a down payment timeline look like?
It shifts money from longer to shorter holdings as the date nears: a 52-week bill first, then a 26-week bill, then everything in savings.
Worked example: A two-year plan for a $350,000 home
A couple wants 10% down plus closing and moving costs, $48,000 in total, with a purchase window from May to November 2028. They have $24,000 today, add $1,000 to savings at the end of each month and keep a separate emergency fund. Bill prices use Treasury's October 30, 2026 rates; the month-12 purchase assumes today's 26-week rate, which in practice will differ. Savings earn an illustrative 3.75% APY.
| When | Step | Savings balance | Bills held |
|---|---|---|---|
| November 2026, month 0 | Buy $18,000 face of 52-week bills for $18,000 × (1 − 0.0417 × 364 ÷ 360) = $17,241.06 | $6,758.94 | $18,000, due November 2027 |
| November 2027, month 12 | The bill pays $18,000. Add $6,000 from savings and buy $24,000 face of 26-week bills for $24,000 × (1 − 0.0411 × 182 ÷ 360) = $23,501.32; the $498.68 left over returns to savings | $13,715.96 after the move, up from $19,217.28 | $24,000, due May 2028 |
| May 2028, month 18 | The 26-week bill pays $24,000 into savings as the window opens | $44,017.04 | None |
| September 2028, month 22 | Savings pass the $48,000 goal | $48,578.99 | None |
| November 2028, month 24 | If the purchase waits, savings keep growing | $50,881.04 | None |
By month 22 the couple has deposited $46,000, and interest has added $2,578.99. No bill matures after the window opens, so an on-time closing never forces a sale.
A bank CD could replace either bill if a bank pays a competitive rate. At the 1.76% national average, though, a 12-month CD on the same $17,241.06 would earn about $303.44, compared with $758.94 from the 52-week bill. Where to park cash short term compares the shorter options in more detail, and the CD ladder guide shows how to stagger CDs instead of bills.
Is the interest on down payment savings taxed?
Yes, all of it is federally taxable, but Treasury bill interest is exempt from state and local income tax and is generally reported in the year the bill matures.
In the timeline above, the two bills earn $758.94 and $498.68, reported for 2027 and 2028 as each matures, and savings interest supplies the other $1,321.37 of the $2,578.99 total. The IRS treats savings interest as income in the year it is credited, even if you never withdraw it, and a CD with a term of more than a year can create taxable interest each year before it matures. At an illustrative 22% federal rate, the $2,578.99 would add about $567 to the couple's federal tax over three tax years, and where state income tax is 5%, the bills' exemption saves about $62.88. Paying that tax from income rather than from the fund keeps the plan on schedule. Are T-bills taxable covers how bill interest is reported on Form 1099-INT.
How do you move the money safely at closing?
Plan the transfer days ahead, confirm wiring instructions by phone with a number you already know, and never act on emailed changes to those instructions.
Closing funds are a favorite target for scammers. The CFPB's mortgage closing scam warning describes emails, sent days before closing and posing as your agent, with last-minute changes to the wiring instructions. Its five steps:
- Identify two trusted people, such as your real estate and settlement agents, and save their phone numbers in advance.
- Treat last-minute changes to the closing process or payment details as suspect.
- Do not use phone numbers or links from an email; call the numbers you saved.
- Never send financial information by email.
- Be careful on the phone too, and check back with your trusted contacts if a caller asks you to verify details.
If money goes to the wrong account, call your bank or wire company at once to try to stop or reverse the transfer, and file a complaint with the FBI's Internet Crime Complaint Center.
Timing matters as well. A bill sold through a broker takes at least a business day to settle, and the cash then has to reach the bank sending the wire. Moving everything into savings a few weeks before closing, as in the timeline above, avoids a last-minute scramble.
What are the risks to down payment savings before closing?
The biggest are a closing date that arrives before your money matures, penalties or price losses on early exits, falling rates and fraud at closing.
- Timing risk. If you find a home sooner than planned, a bill or brokered CD may have to be sold at market price, and a bank CD may charge its early withdrawal penalty. Keeping the earliest possible closing date, not the hoped-for one, as the last maturity limits this.
- Rate risk. Savings rates float and the next bill may pay less. Both follow the Fed, whose next moves from a target range of 3.75% to 4.00% will decide how much these accounts pay before you close.
- Moving targets. Home prices, insurance and mortgage rates can change faster than savings grow, so revisit the target each year.
- Coverage limits. Bank deposits are insured up to $250,000 per depositor, per insured bank, per ownership category, government money market funds are not insured, and bills are backed by the US government.
- Mixing goals. Spending the down payment on an emergency resets the plan, which is why the cushion lives in a separate account.
Market and rate figures on this page come from FRED, Treasury and the FDIC as of late October 2026 and were checked on November 1, 2026 under our editorial policy. Browse the safe investments hub for related guides, or the tools page for every calculator.