What You Should Know about Callable CDs

What You Should Know about Callable CDs

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Callable CDs are much like normal CD accounts with a twist. Are they the right type of investment for you?

Certificates of deposit are great ways to invest your money to have it working for you. However, it only works if you don’t need to touch that money for the life of the CD. CD rates are at decent levels right now, but getting higher yields is always the goal of many investors.

For those who are looking for larger yields without risking too much, a callable CD may be the ideal approach. Callable CDs have better returns than traditional CD accounts and they are even insured by the FDIC. But while callable CDs seem like a great deal, there is some fine print that you should know before putting all of your money into one.

One of the main differences between a callable CD and a traditional CD is that the issuer of a callable CD can “call” your CD from you before it fully matures. This means that the bank can end your CD after a certain amount of time and return your money with interest. For instance, if you have a callable CD with a call date of one year, the issuing bank will evaluate your CD account each year and determine if it wants to keep your money in the account or close out the account.

The call date on a callable CD is much different than the maturity date. Maturity date refers to the actual length of the CD. You can have a maturity rate of one year, five years, 10 years and even longer. The call date will always be shorter than the maturity date.

But why would a bank want to “call” your CD and return your money with interest? Since interest rates change from time to time, the bank will always want to make sure it is getting the best deal. If the interest rates decline significantly, the bank can borrow money at lower rates than what your callable CD is earning. As a result, the bank will see that it is in their best interest to stop paying the current interest rate on your CD and close it out. You would then have to find another way to invest the money.

While callable CDs offer higher yields, they tend to have a great deal of uncertainty attached to them. There is nothing wrong with investing in a callable CD if you are comfortable with it getting closed out before maturity. But knowing the difference between these two types of CD will help you make an informed decision about the best investment opportunities for your situation.

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Today's Highest Online CD Rates

Bank Product Term Interest Rate (APY)
TotalDirect, a division of City National Bank of Florida 1-Year 2.50% APY with $25,000 minimum
Home Loan Investment Bank 1-Year 2.45% APY with $2,500 minimum
Quontic Bank 1-Year 2.40% APY with $1,000 minimum
TotalDirect, a division of City National Bank of Florida 3-Year 2.60% APY with $25,000 minimum
Connexus Credit Union 3-Year 2.50% APY with $5,000 minimum
Navy Federal Credit Union 3-Year 2.45% APY with $100,000 minimum
Navy Federal Credit Union 5-Year 3.00% APY with $1,000 minimum
Dollar Savings Direct, a division of Emigrant Bank 5-Year 2.80% APY with $1,000 minimum
Connexus Credit Union 5-Year 2.60% APY with $5,000 minimum

See More Online CD Rates →

Comments

  • Sam Cass

    July 28, 2010

    Where can someone buy callable CDs? I've never seen them advertised at the bank. Is this a brokerage product or a type of brokered CD?

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