Pros and Cons of Jumbo CDs
Most CDs, whether they are jumbo or normal, are insured by regulatory bodies such as the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). Unlike a normal savings account that you open at a bank, CDs have limited terms. Some CD term lengths may be a decade or more, or they may only last a few days. The standard range of CD length options is between six months and five years.
A jumbo CD is a certificate of deposit that has a higher minimum investment than a normal CD. Most jumbo CDs require a minimum deposit of $100,000, and they offer investors the opportunity to earn interest in the same way that interest is earned on a normal savings account.
While individuals might purchase jumbo CDs, banks and other institutional investors are the typical customers for these high-denomination certificates of deposit. Banks and other investors usually deploy jumbo CDs as temporary investment vehicles that they can use to earn high amounts of interest before applying the funds produced by the matured CD to other ventures. Jumbo CDs are also convenient forms of collateral for businesses seeking loans or other forms of financing.
Jumbo CDs vs. Normal CDs
The main benefit of jumbo CDs in comparison to normal CDs is that jumbo CDs usually pay out higher amounts of interest. While you'll have to shell out more cash to receive a jumbo CD, you'll earn interest at a faster rate, which may justify the initial investment.
Since there are higher stakes involved, most issuing bodies require that entities requesting jumbo CDs go through more intensive hurdles to receive and redeem their certificates of deposit. For instance, issuing bodies may charge fines if investors attempt to withdraw their jumbo CDs early but these fines are greatly reduced, if not nonexistent, for normal CDs.
Due to their higher minimum denominations, jumbo CDs may be beyond the means of individual investors. Individuals seeking high-interest savings vehicles would be better off choosing a normal CD or picking a traditional high-interest savings account.
Jumbo CDs with longer terms almost always pay out higher interest rates, but you'll have to wait for your jumbo CD to mature if you want to capitalize on these high rates. As you consider whether you want a jumbo CD, normal CD, or a traditional savings account, keep in mind that CDs do not adjust for inflation.
For instance, if the inflation rate is 2% and the interest rate on your CD is 3%, you'll only receive 1% interest on your CD. Due to this lack of inflation adjustment, the only way to make a jumbo CD worthwhile is to choose a long-term CD in which the interest rate will outstrip the inflation rate over time. However, keep in mind that your investment will be out of reach for a significant period of time if you pick a long-term jumbo CD.
Jumbo CDs: Pros and Cons
- High-interest rate
- A convenient temporary vehicle for funds
- Guaranteed by powerful regulatory agencies
- Easy to withdraw funds once the account reaches maturity
- A convenient form of collateral when seeking loans
- Jumbo CDs don't adjust to inflation
- Most jumbo CDs require a minimum denomination of $100,000, which is out of reach for most individuals
- Penalties are charged if you try to withdraw your funds early
- Jumbo CDs don't make sense for individual investors, and they are more geared toward larger institutions
Top Jumbo CD Rates for 2019
As you search for the right CDs for your investment purposes, it's important to know which jumbo CDs are currently paying out the highest interest rates. These rates are always subject to fluctuation, but here are a few of the current high-payers in the jumbo CD market:
- Veridian Credit Union: This credit union breaks with convention by offering a super-short 18-month jumbo CD that offers 3.05% interest. Like most jumbo CDs, this plan requires a minimum investment of $100,000. Veridian Credit Union also offers a four-year jumbo CD that provides 3.45% interest.
- KS StateBank: This investment institution currently offers a number of high-paying jumbo CD options that all require a minimum deposit of $100,000. For instance, you can get a one-year CD that offers 2.75% interest, a two-year CD that offers 3.1% interest, a three-year CD that offers 3.25% interest, or a five-year CD that offers 3.51% interest.
- My eBanc: This online lending institution offers a short-term jumbo CD that offers 2.25% interest, which is a significantly higher interest rate than most institutions offer. The minimum investment for this jumbo CD is $100,000.
- M.Y. Safra: If you only want to invest $100,000 for a significantly short period of time, you can choose a three-month jumbo CD that offers 1.25% interest.