You Can Game Some Long-Term CD Rates

A couple of months ago we advised against buying long-term CDs at the bottom of a rate cycle.

The common wisdom is to go long at the top of a rate cycle and short at the bottom.

Some of our readers disagreed with that strategy.

“You can usually go for the longest term to lock in the highest rate, then break the CD if rates go up substantially,” Mark C. told us.

Even after paying the early withdrawal penalty “you will usually come out equal or better to the shorter-term CD’s yield…”.

So we decided to test that theory with the best-paying nationally available 5-year CDs. They are:

3.50 APY from Bank United, with a $5,000 minimum deposit.

3.30% APY from EverBank, with a $1,500 minimum deposit.

3.25% APY from DimeDirect.com, with a minimum of $500.

Bank United, which has 75 branches in Florida, has the most reasonable early-withdrawal penalty: After the first year, you forfeit six months worth of interest.

If you take your money out after a year, and only get paid for six months worth of interest, then you’d still have earned 1.75% — almost as much as the 1.90% APY the top-paying 12-month CD is paying.

Hold on to your 5-year CD for 24 months and that return grows to something like 2.6% — which is more than the 2.30% APY you can earn with the best 24-month CD.

So in this instance, Mark is right. You can game Bank United’s 5-year CD to make bigger short-term profits.

(Dear Bank United executives: While I’m saying that it’s possible to take advantage of your long-term CD rates in this way, I’d never encourage our readers to do such an irresponsible thing. Please put down the phone. DealMaven)

But as another reader, KenBDG, said during this discussion: “One important note is that early withdrawal penalties can vary considerably. Some 5-year CDs have only a 6-month penalty, but some have much higher penalties.”

EverBank, based in Jacksonville, Fla., is one of those banks.

It charges one-quarter of the interest you would earn over the entire 5-year term, no matter how long your keep it.

Take your money out after one year, you’ll actually lose money. They’ll reclaim all of the interest you earned and ding your principal for the rest.

(That’s harsh. Do you know of any other bank that won’t return your full, initial deposit, on demand?)

Keep it for two years and your return will be a paltry 0.5%.

DimeDirect.com, the online operation of Dime Savings Bank of Williamsburgh, which has almost two dozen branches in the New York area, charges 24-months worth of interest.

Take your money out before two years are you’ll earn nothing, although Dime will return the full amount of your principal.

Neither of those are good deals for savers plotting to hop out early.