Maximizing Your Savings with Certificates of Deposit (CDs)

A certificate of deposit (CD) can be a great way to earn a higher interest rate compared to a traditional savings account. It offers a secure place to keep your short- to medium-term savings. While opening a CD with your current bank or credit union might seem convenient, it may not always provide the best interest rates. Here are four steps to help you find the best CD based on your financial goals.

Understanding Different Types of CDs

Before diving into the world of CDs, it’s essential to understand the various types available and their respective pros and cons:

• Regular CDs: These allow you to set aside money and earn interest over a fixed term. However, withdrawing funds before the CD matures can result in penalties.
• High-yield CDs: These are regular CDs that offer higher interest rates.
• Jumbo CDs: These require a larger minimum deposit (often $75,000 to $100,000) but offer higher interest rates.
• Brokered CDs: Purchased through a brokerage account, these CDs can sometimes offer higher yields and can be sold on secondary markets without early withdrawal penalties. However, they might be callable, meaning the bank can redeem them early.
• IRA CDs: These are part of an individual retirement account (IRA) and offer tax advantages. Consider your retirement income needs and whether a CD is the best investment for your IRA.
• Bump-up CDs: These start with a lower interest rate but allow you to request an interest rate increase (usually once) to the current offered rate.
• Step-up CDs: These start with a low interest rate that automatically increases several times over the CD’s term. The timing and rates are predetermined.
• No-penalty CDs: These allow you to withdraw your money early without penalties but often have lower interest rates.
• Add-on CDs: These allow you to add money to your CD while it matures, often at a lower interest rate.

Consider When You Need the Money

While your goal might be to earn as much interest as possible, the CD with the highest rate isn’t always the best choice. Your total earnings depend on the CD’s term, features, and when you need the money.

If You Won’t Need the Money Soon

If you believe interest rates will remain stable and you won’t need the money soon, consider a regular CD, jumbo CD, or brokered CD. If you expect rates to rise significantly, a bump-up CD might offer a higher overall return despite starting with a lower rate. Conversely, if you think rates will fall, opt for the CD with the highest starting rate. Avoid callable brokered CDs in this scenario, as the issuer can redeem them early, causing you to lose potential interest earnings.

If You Might Need the Money Soon

If you lack an emergency fund or anticipate needing the money early, consider the CD’s early withdrawal penalty. While you won’t lose your initial deposit, you may forfeit some earnings. Penalties vary significantly, ranging from two months’ to 18 months’ worth of interest.

If early access to funds is a concern, consider a no-penalty CD or a high-yield savings account. A regular CD might still be a good option if it offers a much higher interest rate and a small early withdrawal penalty. Brokered CDs also provide the option to sell without penalties, but there’s a risk of selling for less than the initial purchase price, potentially resulting in a loss.

Know Where to Look

Interest rates for different types of CDs can vary significantly depending on the issuer. You can open a CD with various financial institutions, including:

• Banks: Both traditional and online banks offer CDs, with online banks often providing slightly higher rates.
• Credit Unions: These sometimes offer higher interest rates but require membership eligibility.
• Brokerage Accounts: Brokerages can offer higher rates by buying CDs in bulk and splitting them for customers.

Each institution may offer different types of CDs with varying interest rates, terms, penalties, and minimum deposit amounts.

Find the Best CD for Your Needs

Ultimately, the best CD for you depends on your budget, timeline, and financial goals. If simplicity is your priority, open a CD with your current bank, credit union, or brokerage. However, if maximizing profits is your goal, you might need to open a new account elsewhere.

Finding the best CD can be challenging. Online aggregation and comparison tools can help filter results based on your deposit amount, desired term, and other preferences. However, these tools may not be comprehensive. Checking with local banks, credit unions, or your brokerage account can also provide valuable options.

Keep CDs in Mind When Managing Your Finances

CDs are a relatively safe and straightforward way to earn interest on your savings. Understanding how they work and finding the best CD can be crucial for managing your finances. Consider CD laddering, a strategy involving multiple CDs to provide regular access to funds. Also, compare the interest rates on high-yield savings and money market accounts to those of CDs.

Monitoring your credit is also essential for personal finance management. Experian’s free credit monitoring service alerts you to changes in your report and provides access to your FICO® Score.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons. We are committed to providing you with the best mortgage solutions tailored to your needs.