Two Months Ago I Bought A 1-Year CD Paying 1.35%; It Was a Mistake

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Less than two months ago, I locked into a 1-year CD paying 1.35%.   It was the best rate at the time and I really am unlikely to need the cash for the next 12 months (now 10 months).  Nonetheless, I know now that I locked in too low.

The best nationally offered one-year CD rates are now paying close to 1.50%.   One-year CD rates offered by banks or credit unions in your local area or state may even be paying higher.  And, Ally Bank is offering an 11-month No Penalty CD that pays 1.50% on balances over $25,000.  The Ally product gives depositors a much better rate than I am receiving and the ability to break the CD without an early withdrawal penalty. 

But, I am not even so sure that I should have locked into a one-year CD at all.  Savings rates are moving up quickly now with plenty of national offerings at 1.30%.  Again, local rates at banks and credit unions that may be available to you may be even higher.

Since I might need the cash to take advantage of the stock market crash that may come when impeachment proceedings begin in the fall, I certainly now wish I had just foregone locking into a gain over cash of what now looks at best to be just a couple of dollars.

Did you know that at some banks it may not even be possible to redeem your CD early, even with the payment of early termination fees?    

Before getting a CD read our 65 Questions to Ask before Choosing a CD which is also available as a e-book by clicking in the right column. 

EBSB Direct Is Offering A 19-Month CD at 1.61%

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Earlier today, EBSB Direct began offering a 19-month CD a 1.61%.  This rate is nationally offered and requires only a $1,000 minimum.

At the time of this writing, this rate is higher than any nationally offered 18-month CD and as high as all but the 5 highest nationally offered 2 year CD rates.   This offer is therefore compellingly priced on a national level.   Of course, there may be higher rates offered in certain markets and you will want to review local rates for 18-month CD rates here and for 2-year CD rates here to see rates in your market before locking in.

Please note that BestCashCow sees short CDs as somwhat compelling now.  However, after the recent Fed move, we think some level of caution is warranted right now around all CD products. Savings rates are rising now, and you run the risk of locking into something that will be offering less than the best savings rates in a matter of months. 

EBSB Direct is a subsidiary of East Boston Savings Bank.  You can learn more about the online bank here, and its parent here.

More information on this and other special-rate CDs can be found here.

Exhausted from Low Savings Account Rates? Consider 5-Year CDs

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It has been 9 years already of making virtually nothing from savings account rates.  Even with the best rates recently moving up to the 1.05% – 1.25% range as the Federal Reserve has raised the Fed funds rate, cash has been a frustrating asset class for many years now.

Many retirees and others who depend on appreciation of their cash not just to live, but to keep pace with real inflation, have begun to throw in the towel.  They have largely moved to riskier asset classes such as municipal bond funds and high yielding dividend stocks. 

I do not dispute the importance of dividend stocks in a balanced portfolio.  Verizon, Exxon and the major European pharmaceutical stocks pay fantastic dividends.  Even if you believe that the stock market is overvalued and ripe for a significant correction as the world begins to grapple with the consequences of an unstable US President, you probably should have some exposure to high yielding equities.

Your exhaustion with low savings rates, however, should not lead you into municipal bonds or municipal bond funds, Treasuries or virtually anything tied to a fixed rate of return over the long term (certainly not annuities, etc.).   If and when interest rates move up, these things will be slaughtered (and, may even become illiquid).

Instead, look to 5-year CDs.   A 5-year CD paying 2.30% provides about twice what leading online savings rates are paying at the moment.   Buying one with a 6-month early withdrawal fee, and reasonable certainty that the bank will honor it (read this article for more information on the risk to early withdrawal fees) will provide significant returns in today’s market and will also likely yield roughly about as much as an online savings account were you to redeem it early after, say, 12 months or a 1-year CD.  Most important,, you will have the option to hold it for the remaining four years and continue to make 2.30%.   And, equally importantly, you will not be slaughtered.

Key takeaway: Look at the early withdrawal fees on 5-Year CDs.  While EverBank’s fees are excessive, other major online banks have early withdrawal fees geared to match between six months and 1 year of interest.  

In sum, a number of 5-year CDs offered by leading FDIC-insured banks have 6 month early withdrawal options that provide the best and safest investment options for those who need steady and above-market interest rates. 

Easing Back Into CDs

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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

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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

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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.