“A Comprehensive Guide to Certificates of Deposit (CDs)”

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Understanding Certificates of Deposit (CDs)

A certificate of deposit (CD) is an interest-bearing account that can help grow your savings more quickly. Unlike a traditional savings account, funds are typically locked into a CD for a predetermined period, but you can expect higher-than-average interest rates. A CD can be a good choice if you’re looking for a low-risk investment and don’t mind sacrificing liquidity. Here are some key terms you need to know to maximize your money and avoid fees.

Earn Money Faster with High-Yield CDs

At O1ne Mortgage, we understand the importance of making your money work for you. That’s why we recommend exploring high-yield CDs. These accounts offer competitive interest rates, helping you grow your savings more efficiently.

Key Terms to Know

Annual Percentage Yield (APY)

The APY refers to the interest you’ll earn on a CD. The higher the yield, the better the return—assuming you avoid early withdrawal penalties. APYs vary from one financial institution to another but generally follow the federal funds rate. As of January 2024, CD rates are well over 5%, and they typically have fixed rates.

Term Length

The CD term is the duration it takes for the account to mature, ranging from one month to five years. During this time, most CDs require you to leave your money in the account. Short-term CDs may be better if you need funds sooner, while longer terms might offer higher APYs.

Maturity Date

The maturity date is when a CD’s term expires. At this point, you’ll generally have seven to 10 days to decide what to do with your cash. You can either roll your money into a new CD, put your funds toward a financial goal, or spend it as you like.

Minimum Opening Deposit

Opening a CD often requires a minimum deposit, typically ranging from $500 to $2,500. Some CDs have no deposit requirements, while others, known as “jumbo CDs,” require at least $100,000 and generally offer higher interest rates.

Early Withdrawal Penalty

When you open a CD, you agree to leave your money in the account until it matures. Withdrawing funds early usually triggers an early withdrawal penalty, which can be as much as 540 days’ worth of interest.

CD Barbell

This strategy involves opening one short-term CD and another long-term one. The longer-term CD ideally pays a higher yield, while the short-term CD provides liquidity for immediate financial goals.

CD Ladder

A CD ladder involves putting money into several CDs with different term lengths. This way, they expire on a staggered basis, unlocking money as you go along. You can reinvest your funds or spend them as you like.

Bump-Up CD

A bump-up CD allows you to request an interest rate increase to reflect current market rates, usually as a one-time benefit. However, these CDs tend to have lower initial yields than those without rate adjustments.

Step-Up CD

Similar to a bump-up CD, a step-up CD allows you to increase your interest rate automatically at predetermined intervals. This can be beneficial if market rates rise, but starter rates are typically lower than traditional CDs.

IRA CD

An IRA CD is a CD invested for retirement, offering the tax benefits of an IRA with the stability and attractive yields of a CD. However, early withdrawal penalties can be steeper if you need your funds sooner than expected.

Interest Rate Risk

Interest rate risk is the chance that you’ll miss out on better returns if rates increase after you open a CD. Strategies like CD ladders, CD barbells, step-up CDs, or bump-up CDs can help mitigate this risk.

At O1ne Mortgage, we are committed to helping you make the best financial decisions. For any mortgage service needs, call us at 213-732-3074. Our team of experts is here to assist you in finding the best solutions for your financial goals.

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