4 important facts to know before investing in jumbo CDs
The Federal Reserve's recent interest rate hikes have caused the cost of borrowing to skyrocket compared to a year ago. But while borrowers pay more for credit cards, personal loans and mortgages, rate hikes can have a bright side: higher annual percentage yields (APYs) on interest-bearing accounts, like high-yield savings accounts and certificates of deposit (CDs).
That's why many savers and investors are opting to put money into these types of accounts right now. With a CD, in particular, you agree to lock away your money for a certain length of time in return for guaranteed interest on your money. As such, it can be a safe, easy way to grow your savings without much risk.
But there are numerous CD terms and types to choose from, including jumbo CDs designed for higher deposits. By putting your money into a jumbo CD, you may be able to earn hundreds or even thousands of dollars in interest. Before you make this move, though, it's important to understand a few important facts about investing in jumbo CDs.
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4 important facts to know before investing in jumbo CDs
Jumbo CDs are a unique financial instrument that can be both advantageous and complex. Here's what to keep in mind before putting your money in a jumbo CD.
Higher deposits are required on jumbo CDs
As the name suggests, jumbo CDs require more substantial deposit amounts than traditional CDs. While the exact threshold for what qualifies as a jumbo CD may vary between financial institutions, the minimum deposit requirement generally starts at $100,000 or more. By comparison, regular CDs typically require a deposit of just a few hundred dollars.
This higher deposit requirement might not be feasible for everyone. The low minimum deposit threshold for regular CDs makes them more accessible, and jumbo CDs are often more suitable for investors with a significant amount of capital at their disposal. In turn, it's important to assess your financial goals and available funds before deciding on a jumbo CD.
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Jumbo CDs may offer higher interest rates — but not always
One of the most compelling reasons that savers and investors consider jumbo CDs is the potential for higher interest rates. Financial institutions may offer higher rates on jumbo CDs compared to their standard counterparts — but that's not always the case. Because of the unique interest rate climate, many regular CDs currently offer interest rates that are as high or higher than what jumbo CDs are offering — up to 5% or more on your money.
In general, though, higher than average interest rates can be offered in return for the larger deposit requirement associated with jumbo CDs. By locking your funds in a jumbo CD, you can take advantage of these elevated interest rates, thereby enhancing the overall returns on your investment.
Jumbo CD availability is limited
Unlike regular CDs, jumbo CDs are not readily available at all financial institutions. Smaller banks or credit unions might not offer this option, limiting your choices when considering this investment.
Typically, larger financial institutions cater to jumbo CD investors, so it is essential to explore multiple options to find the best rates and terms — and determine which financial institutions offer these types of CDs. If you're interested in a jumbo CD, it may also be smart to check online banks, as they sometimes provide competitive rates on jumbo CDs.
Laddering your CDs may make more sense right now
Because regular CD rates are so high right now, it may make more sense to use your $100,000 or more to ladder your CDs using regular CD accounts offering rates of 5% or more. Laddering involves spreading your investment across multiple CDs with varying maturity dates to achieve financial diversification with reduced risk. By doing so, you ensure that a portion of your funds becomes available at regular intervals, allowing you to capitalize on potentially higher interest rates in the future.
Laddering also provides greater flexibility and liquidity compared to tying up a significant amount of money in a single jumbo CD. If you're ready to get started, find out more about what you could earn with a CD here now.
The bottom line
Jumbo CDs can be an attractive option for high-net-worth savers or investors who are seeking to grow their wealth through higher interest rates. However, they come with higher deposit requirements and limited availability — and right now, it could make more sense to take a different CD approach altogether.
Before opting for a jumbo CD, carefully assess your financial situation and explore alternatives, such as laddering your CDs, to achieve your financial goals while managing risk effectively. If you still aren't sure whether a jumbo CD makes sense for you, you may want to consult with a financial advisor to learn valuable insights for your specific financial circumstances.
