Introduction

As interest rates rise on certificates of deposit (CDs), these accounts are getting a second look from investors who want stable, predictable returns. But is there any risk to opening a CD? Can you ever lose money on these accounts? In this article, we will explore how CDs work, the potential risks involved, and how to maximize your savings with them.

How Does a CD Work?

A CD is a savings account that holds a fixed amount of money at a fixed interest rate for a fixed period of time. Here’s how that breaks down:

• Fixed deposit: When you open a CD, you agree to keep your opening deposit in your account for an agreed-upon term. For example, if you open a 12-month CD with $5,000, plan to keep your $5,000 in the account for a whole year.
• Fixed interest rate: The annual percentage yield (APY) on a CD doesn’t change. The rate you start with is the rate you get. Although less common, variable-rate CDs and bump-up CDs that let you adjust your rate once during the CD’s term also exist.
• Fixed term: A CD comes with a fixed term, usually between three months and five or 10 years. When your CD reaches its maturity date, your account dissolves. You’ll need to invest funds elsewhere or roll them over into a new CD. Some CDs automatically renew.

Your deposits are insured up to $250,000 in the event of a closure at an FDIC-insured bank or NCUA-backed credit union. CDs purchased through a brokerage house or other non-bank entity may not be federally insured, so check before you open an account.

What Is a CD Early Withdrawal Penalty?

What if you want to invest your money elsewhere or use it to cover an emergency expense? When you take money out of your CD prior to its maturity date, you’ll be subject to an early withdrawal penalty, which should be spelled out in your CD’s deposit agreement. A typical early withdrawal penalty might be 90 days of interest on a six-month CD or 365 days of interest on a three-year CD.

The penalty might be limited to the interest you’ve earned but, if not, it could affect your principal balance. For example, if you open a six-month CD with a 90-day penalty for early withdrawal and withdraw your money after 30 days, your penalty is 90 days of interest but you’ve only earned interest for 30 days. Unless your deposit agreement limits your penalty to the interest you’ve earned, you may have to pay the difference from your principal.

CD early withdrawal penalties normally aren’t catastrophic, but they do eat into your potential earnings. They’re meant to discourage you from moving money out of your CD account. Financial institutions generally don’t charge maintenance or other fees on CDs; they rely on your money remaining in the account for the full term to justify the interest you earn.

How to Maximize Savings With a CD

Choosing the right CD means finding the best interest rate and the most suitable term for you. Here are a few tips:

• Compare CDs from multiple banks and credit unions to find the best APY.
• Choose a term you can live with. You should be confident you can leave your money in the CD undisturbed for its full term to avoid early withdrawal penalties.
• Consider laddering your CDs by opening multiple CDs with different maturity dates. This way, you can avoid having all your money locked up for one period of time.
• Understand your alternatives. You may prefer the flexibility of a high-yield savings or money market account, or get a higher rate of return on bonds or other investments.
• Read the fine print to fully understand early withdrawal penalties, grace periods, automatic renewals, and more. Details may vary.

The Bottom Line

CDs can add stability and predictability to your savings and investment portfolio. With a CD, you usually know exactly how much interest you’ll earn and for how long—and you don’t run significant risk of losing your investment.

In exchange for predictability, you agree to keep your money in your CD for the duration. To ensure this strategy meshes with your overall financial goals, you may want to meet with a financial advisor—or review your own portfolio—to understand the underlying potential for risk and return. You may also want to check your available (non-CD) savings and credit health, so you know what your options would be if you were confronted with sudden expenses. Understanding how CDs fit into your overall financial picture can help you decide whether or not they work for you.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we are dedicated to helping you achieve your financial goals. Whether you’re looking to invest in CDs or need expert advice on mortgage services, our team is here to assist you. Call us today at 213-732-3074 for any mortgage service needs. Let us help you make the best financial decisions for your future.