Capitalize On High CD Rates With Bump Up CDs
Nowadays, traditional CD rates aren’t hooking in as many customers. In order to capitalize on appropriate CD rates, most investors are looking for more flexible investment options.
Play the Market with Variable CDs
As a result, many banks and financial institutions are now offering CDs that have fluctuating interest rates and flexible maturity dates. You often have to give up a little bit of yield in order to gain flexibility with your CD. However, many CDs offer benefits that are just too good to pass up.
Bump-up CDs have become all the rage in banking institutions. These CDs give investors crucial freedom regarding interest rates. In fact, if interest rates rise while you own a lower-interest CD, the bump up CD allows you to take advantage of the higher interest rates.
For example, let’s say you have bought a five year bump up CD at 1.34% APY. However, two years into your purchase, the bank is now offering 1.5% APY on five year CDs. If you own a bump-up CD, you can upgrade your CD to the higher interest rate and earn more interest as a result.
According to Dan Edwards of Wells Fargo, “Bump-up CDs increase assets because they’re directly tied to the prevalent interest rate climate.”
Realities of Bump-Up CDs
Keep in mind, some banks will only offer bump-up CDs for shorter term CDs such as two year CDs. The starting yield on bump-up CDs is usually set a bit lower than on traditional CDs, simply because the bank has to assume that interest rates will rise.
When you buy a bump-up CD, you are basically betting that interest rates will rise over the duration of your CD. You are taking a risk here, because if interest rates do not rise, then you’ll be stuck with a low-yield CD.
So, here’s one way to decide whether a bump-up CD will pay off. If you see that the bank is offering a three year CD with a bump up option, and a three year CD without a bump up option but at a quarter percent higher interest rate, then only purchase the bump up CD if you believe rates will rise by more than a quarter of a percent.
Also, the length of time that it takes for interest rates to rise will determine whether your investment pays off. If it takes a long time for interest rates to rise, then it’s likely that the extra time you spend waiting will not have paid off the lower interest that you received during the waiting period.
Know the Rules
You also need to make sure that you know how many times you are permitted to bump up your CD. Many banks will place restrictions on the number of times you can bump up. Some banks may even require that you extend the term of your CD before you bump up.
You should do your own research before buying bump up CDs. Only purchase these CDs if you strongly believe that interest rates will significantly rise during the term of your CD. Otherwise, it is smarter to go with a conservative investment such as a CD.
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