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| Wednesday, July 19, 2006 |
| Variable Rate CD |
Interest rates continue to rise which is bad news for borrowers but great for savers. While the adjustable rate mortgage owner hates to see the Fed raise rates (stinks when your payments keep going up doesn't it?) - savers like me cheer when rates go up. While having your savings in an online savings account such as ING Direct (currently at 4.35% - plus $25 opening bonus) and HSBC Direct (currently at 5.05%) gives you some pretty great returns, for some that is not enough.
For those who want to keep their savings in an ultra-conservative place (like an FDIC insured bank) yet get the best possible return - that usually means exploring a CD or Certificate of Deposit. According to this FDIC article: Certificates of Deposit: Tips for Savers CD's can come in a few different flavors. I was only aware of Fixed Interest CD's (which are still the most common). An example of a Fixed Interest CD is the ING Direct's 12 Month 5.25% Orange CD. You agree to lock your money up for 12 months and the bank agrees to pay you a certain interest rate for that period - regardless of what is happening to interest rates (going up or down).
While this is a great idea when rates are falling, it is not such a great thing to do when rates are rising (as is happening now). So what is a saver to do? Look for Variable Rate CD's of course! E*Trade Bank has one of these, they call theirs a PrimeLink CD. E*Trade's website has a nice little example to explain how this product works: Example:
Let's say you put $20,000 into a 1-year PrimeLink CD when the prime rate was at 5.00%. Assume the current spread is 2 percentage points. The interest rate on the PrimeLink CD would be 3.00% (5.00% prime rate minus 2.00% spread). So, for example, if the prime rate rises to 5.25%, the interest rate on your PrimeLink CD would rise to 3.25%. Of course, if the prime rate goes down, so would your rate. So if you are betting that interest rates will continue to rise, looking into a Variable Rate CD might be a smart thing to do. Or you could just stick with traditional Fixed Rate CD's and just ladder them.
- Certificate of Deposits as Income Stream
- ING Direct referral link experiment |
| posted by Boston Gal @ 12:54 PM *
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I recently bought a variable share certificate (like a cd but from a CU) from Navy FCU. 3 year term ,currently 5.76APY. Rate remains in effect one year, then will be adjusted, adjusted each year on anniversary. It is guaranteed to never go more than 1/2 percentage point below the initial rate. Hopefully it will go up. The past few months the offering rate has been steadily rising. Rates set on the first Monday of each month to equal the yield of the latest Constant Maturity Treasury (CMT). Also on each anniversary you can add money to it.
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I recently bought a variable share certificate (like a cd but from a CU) from Navy FCU. 3 year term ,currently 5.76APY. Rate remains in effect one year, then will be adjusted, adjusted each year on anniversary. It is guaranteed to never go more than 1/2 percentage point below the initial rate. Hopefully it will go up. The past few months the offering rate has been steadily rising. Rates set on the first Monday of each month to equal the yield of the latest Constant Maturity Treasury (CMT). Also on each anniversary you can add money to it.