Easing Back Into CDs

Easing Back Into CDs

Rate information contained on this page may have changed. Please find latest cd rates.

My article late in 2016 on BestCashCow about avoiding CDs longer than 1 year as well as CD laddering strategies got a fair amount of feedback and stirred more than a little controversy.  After all, BestCashCow is a website largely about CD rates that make money, and it is counter to the website’s owners’ interests for its chief economist to lay down such a position. 

Nonetheless, I am glad I took the position when I did.  It was the right position at the time.  Since CD rates have improved quite sharply over the last 2 months, I will moderate this position a bit now.  My reasoning is that the US faces a dramatically uncertain economy over the next several months, a stock market that has run far too high, and a President who, having successfully engineered a coup d’etat, is volatile and unchecked by a Republican Congress.   As a result, we well may see the Fed wind up having to lower rates again.  This could, indeed, be a good time to hedge your bets a little with CDs.

First, long CD rates have started to increase a bit.  We are seeing national rates on the 5-year as high as 2.30%, and even higher at banks and credit unions in some locations [hyperlink: local table].  These rates are very close to matching the highest 5-year CD rates that we’ve seen over the last 6 or 7 years.  At the end of 2016, when the 10 year US Treasury was below 2.00%, so too were the best 5-year CDs.  If the 10-year US Treasury falls again, so too will 5-year CDs.

See 5-Year national CD rates here, and local rates here.

Here is my caveat, nonetheless, about 5-year CDs.   I have stated this before and I will state it again.  Over more than nine years now, CD rates have remained extremely low.  At some point, they will go up, but probably not for some time still.  Therefore, we recommend that you look for CD accounts that have early withdrawal penalties of no more than 6 months. A small penalty protects you should rates go up (or should you have a life event which causes you to need to money early).  A 5-year CD which pays 2.30% and has a 6 month early withdrawal penalty of 6 months of interest will still yield 1.15% if it is terminated in 1-year, after payment of the penalty.  This matches the rate you would receive from pure savings accounts, and therefore you can view the 5-year CD as offering an attractive option.

It is important to note, as BestCashCow has, that your customer agreement will state that early withdrawal is at the discretion of the bank.  While we are not aware of any major online bank refusing early withdrawal with payment of the penalty fee, there have been instances where smaller banks and credit unions have denied requests for early withdrawal.  

It is also important to note, as well, that Synchrony Bank, which offers a 2.30% 5-year CD rate nationally recently changed its terms from 6 months to charge 1 year’s interest as an early withdrawal fee on this product.  This product is, therefore, substantially less attractive than it was 2 years ago when Synchrony last offered it at 2.30%.  The early withdrawal changes do not apply to products purchased previously, but will apply if you renew or auto-renew your CD.   Early withdrawal penalties of over 1 year’s interest on a 5 year CD, such as that of EverBank are unduly excoriating and should be avoided.

In addition to 5-year CDs, we also find 1-year CDs somewhat more attractive than they were previously.    The best rates have gone up from 1.25% to between 1.35% and 1.45% (again, you may find higher local rates here in some markets).   As long as you purchase products that have only 3 months interest as an early termination fee, we see very little risk, but you should continue to question the value of increased yield as pointed out in this article.

Compare the best 1-year CD rates here.

As a primer, those new to CDs should read our article on the 65 questions to ask before Choosing a CD.  The article can also be downloaded as a free eBook from our eBook section at the bottom of the right column of this article.


Jumping Into A One-Year CD Is Not Particularly Compelling Here

Jumping Into A One-Year CD Is Not Particularly Compelling Here

Rate information contained on this page may have changed. Please find latest cd rates.

The best savings rates in online accounts is now in the 1 to 1.05% APY range.  You may find a higher rate here on BestCashCow.  You may also find a higher rate in brick-and-mortar banks or in credit unions.  To boot, some brick-and-mortar banks are offering short-term incentives for current depositors to bring new money (for example, HSBC in New York is currently offering existing depositors a 5-month CD rate on new money of 1.30%).

Against this backdrop, online banks (and offline banks too) are offering one-year CD rates of 1.25%.   Again, you may find a higher rate here.

If you were to purchase a 1.25% 1-year CD with $250,000, the maximum insured by the FDIC or the NCUA in an individual account, your 20 basis point increase over the 1.05% savings rate would amount to an increased pre-tax yield of $500 over the coming 12 months.

Interest rates on savings and money market accounts are not coming down in 2017 and are quite likely to increase.  Even if they were to stay constant, $500 pre-tax is a small sum to receive for sacrificing your liquidity.  Opt for online savings over online 12-month CDs here.


EverBank’s 5-Year CD Rate is Like the Pool at EverBank Field

EverBank’s 5-Year CD Rate is Like the Pool at EverBank Field

Rate information contained on this page may have changed. Please find latest cd rates.

EverBank has become very aggressive with their CD rates again - either because they are trying to be on the cutting edge of increasing yields or because they are eager to attract new capital ahead of TIAA’s overpriced acquisition.

EverBank’s 5-year CD rate is, in fact, already at 2.28% and that has caught our attention because we recently recommended that depositors categorically avoid CD laddering strategies – staying with only short maturities - until they see 5-year rates above 2.30%.

We recommend that depositors continue to exercise extreme caution here, especially with EverBank.  EverBank’s early withdrawal fee, as stated in the bank’s terms and conditions, is one quarter the total amount of interest that would have been earned had the CD been held to maturity.  A three-month early withdrawal fee on a one-year CD is quite reasonable; this is consistent with the fee charged by Sallie Mae or BAC Florida, two banks which aggressively compete in the 1-year term space.   Giving up 15 months of interest to terminate a five-year CD early, however, is not market.  It is excessive, exculpatory.   Especially with longer term CDs, we also suggest caution as banks do retain the right to deny an early redemption request (and, in this regard, TIAA’s awful customer service history scares us greatly as well).

A good starting point for investing in CDs is by reading BestCashCow’s e-Book on 65 questions to ask before choosing a CD.   Depositors then need to carefully read the bank’s terms and conditions before they invest.     Some banks – like Everbank – may include wording that you will need to decipher.

With the case of EverBank, it is a lot like jumping into the pool at EverBank Field.  The pictures of the pool look wonderful so long as they are take with four models when the stadium is empty.  Once you have bought your ticket to the game, though, you will find it full of drunk guys and the water might not exactly be so healthy for you either.  

Explore all CD rates here.