Should I terminate CD to get a better rate?

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protagonist
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Should I terminate CD to get a better rate?

Post by protagonist »

I am 50 months into a 60 month IRA certificate at 2.25% APY with a 6 month EWP at North Country FCU. By my calculations, if I terminated now and paid the EWP I would get 2.00%.

Andrews FCU offers a 3% APY 84 month IRA certificate. They have offered it for quite awhile, but I have no idea if it will still be available when my other certificate matures in June, 2017.

Would it be a wise decision to terminate my 2.25% certificate now and transfer the funds into a 3% certificate at Andrews?
sport
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Re: Should I terminate CD to get a better rate?

Post by sport »

The 6 month EWP will cost you 1.125%. You will make that up in less than two years with the new CD because the difference is 0.75% per year.
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in_reality
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Re: Should I terminate CD to get a better rate?

Post by in_reality »

The interest penalty is tax deductible too!

At one time it was line 30 of your Form 1040.

Early-withdrawal penalties are Box 2 of Form 1099-INT.

Times may have changed....
clydewolf
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Re: Should I terminate CD to get a better rate?

Post by clydewolf »

The EWP still goes on line 30 of your 1040 as an adjustment to income.

The Andrews FCU CD has a 6 month EWP, so if the rates increased sufficiently it may be worth terminating that CD.

The next question is, In the next 10 months will the interest rates increase sufficiently for you to stay put?
Probably not.
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

sport wrote:The 6 month EWP will cost you 1.125%. You will make that up in less than two years with the new CD because the difference is 0.75% per year.
I believe that is 0.25% that it will cost me, no?
By my calculations, after 50 months, a 5 yr CD at 2.25% should yield 2%.

Did I make a mistake? I'm confused by the 1.125% figure.
missedit
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Re: Should I terminate CD to get a better rate?

Post by missedit »

protagonist wrote:
Andrews FCU offers a 3% APY 84 month IRA certificate. They have offered it for quite awhile, but I have no idea if it will still be available when my other certificate matures in June, 2017.
can you provide a link? - all I am seeing is 1.9% for a 60 month CD
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Epsilon Delta
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Re: Should I terminate CD to get a better rate?

Post by Epsilon Delta »

protagonist wrote:Andrews FCU offers a 3% APY 84 month IRA certificate. They have offered it for quite awhile, but I have no idea if it will still be available when my other certificate matures in June, 2017.
Do you have a better idea if that 3% offer will be replace by 3.25% or 2.75%?

This is not a simple arbitrage, this is a bet about how interest rates will move between now and June 2017. The swap is betting they will drop.
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Re: Should I terminate CD to get a better rate?

Post by Epsilon Delta »

protagonist wrote:
sport wrote:The 6 month EWP will cost you 1.125%. You will make that up in less than two years with the new CD because the difference is 0.75% per year.
I believe that is 0.25% that it will cost me, no?
By my calculations, after 50 months, a 5 yr CD at 2.25% should yield 2%.

Did I make a mistake? I'm confused by the 1.125% figure.
You made a mistake. You're calculating the wrong thing.

It is true that (1+2.25%)^(34/12) is approximately (1+2%)^(40/12) but it's largely irreverent.

Do the same calculation for longer and longer term CDs and by your reasoning the penalty goes to zero. In a proper analysis the past is prologue, what ever happened more than 6 months ago (the beginning of the penalty period) is irrelevant. That is for purposes of taking an early withdrawal it doesn't matter if you bought a 50 month $10,000 CD 40 months ago or a 386 month $5,000 CD 31 odd years ago. Both are worth the same now, and the penalty and maturity are the same.
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Epsilon Delta wrote:
protagonist wrote:Andrews FCU offers a 3% APY 84 month IRA certificate. They have offered it for quite awhile, but I have no idea if it will still be available when my other certificate matures in June, 2017.
Do you have a better idea if that 3% offer will be replace by 3.25% or 2.75%?

This is not a simple arbitrage, this is a bet about how interest rates will move between now and June 2017. The swap is betting they will drop.
Andrews' rate is significantly better than any others I could find at this time (I opened an IRA certificate with them at that rate about a month or two ago, and people were posting the rate on this site last winter). It has been stable for quite awhile. But the reason I am considering the swap is that it would take a rather large move for other banks to come up to the 3% rate by 6/17, and there is no reason for me to believe that Andrews will maintain their rate for another 9 or 10 months.
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Re: Should I terminate CD to get a better rate?

Post by Rob5TCP »

I've closed two CD's to move them there. One was the first year of a 5 year 2.25% with a six month penalty and the other was in the second year of a 1.3% 2 year; essentially I lost most of the interest accumulated on the 2 year. My calculation showing me breaking even on the first in about 18 months; and breaking even in the second within a year.

Andrews has a 6 month EWP; and the highest current rate by far for an IRA (3% for 7 years). I am also considering breaking an Ally IRA CD as well and add to this.
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Rob5TCP
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Re: Should I terminate CD to get a better rate?

Post by Rob5TCP »

in_reality wrote:The interest penalty is tax deductible too!

At one time it was line 30 of your Form 1040.

Early-withdrawal penalties are Box 2 of Form 1099-INT.

Times may have changed....
These are IRA only CD's so I don't know that any tax deduction would be applicable.
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Epsilon Delta wrote:
protagonist wrote:
sport wrote:The 6 month EWP will cost you 1.125%. You will make that up in less than two years with the new CD because the difference is 0.75% per year.
I believe that is 0.25% that it will cost me, no?
By my calculations, after 50 months, a 5 yr CD at 2.25% should yield 2%.

Did I make a mistake? I'm confused by the 1.125% figure.
You made a mistake. You're calculating the wrong thing.

It is true that (1+2.25%)^(34/12) is approximately (1+2%)^(40/12) but it's largely irreverent.

Do the same calculation for longer and longer term CDs and by your reasoning the penalty goes to zero. In a proper analysis the past is prologue, what ever happened more than 6 months ago (the beginning of the penalty period) is irrelevant. That is for purposes of taking an early withdrawal it doesn't matter if you bought a 50 month $10,000 CD 40 months ago or a 386 month $5,000 CD 31 odd years ago. Both are worth the same now, and the penalty and maturity are the same.
The current CD (2.25%, 6 mo EWP) is 50 months into a 60 month period.

The potential new CD (3%, 6 mo EWP) is an 84 month CD.

Are you calculating 1.125% loss re: the value at redemption, since I would be losing 2.25%/2 x principal during a 6 month period? Please educate me.

If that is the case, assuming I could close the old CD and open the new one the same day, would it be reasonable to assume that, in order to come out ahead with a 3%/6 mo EWP CD, I would have to hold the new CD for about 10-11 months (at which time, if I redeemed after 11 months, I would receive about 1.35% APY on the principal invested)? . At that point my total should be about the same. I am estimating "about the same", since the 10-11 month period would also take me to approximately the time that the current CD would mature. That said, if I waited until the current CD matured, I would be facing a subsequent penalty period with a new CD, so in theory the new CD would have to yield MORE than 3% if purchased in June 2017 to break even, since if I purchased today my 6 months (EWP) on the new CD would be over around February, right?

If that is the case, it seems the only way I could potentially lose (and still not by much) is if yields skyrocketed between now and mid-2017, and I missed out on a much better deal.

I need to learn how to properly calculate the value of CD switching. There was a time when I was adept at higher, theoretical math. But I am seriously rusty. Now I can be easily confounded by ninth grade Algebra I. (sigh)
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

First thing you can do is plug your numbers into When to Break a CD Calculator - Is the improved interest worth an early withdrawal penalty? at DepositAccounts.com. When I do this, it tells me that I should not break the CD. The reason is that the 0.75% differential in rates is not enough to make up for the 1.125% penalty in 10 months. But that's not the end of the analysis.

Next I'd think about what I thought the chances were of a 5-year or 6-year 3% rate being available when the current CD matures in 10 months. Personally I'd bet against it, so this would favor breaking and reinvesting at the higher rate. The prevailing sentiment is that rates will be low for a long time, so locking in 3% for seven years probably is a good move. Of course the prevailing sentiment could be wrong, but the EWP of only 180 days of interest is gold for such a long-term CD, and that greatly reduces the risk of betting on continued low rates.

Finally, you have to gamble that the rate will not drop between the time you break your existing CD and pay the penalty and when the IRA transfer process is complete or whenever you lock the rate--there have been reports that Andrews FCU will lock the rate when they receive your transfer form, although they told me "no" when I asked before doing my first transfer in February.

If you get a guarantee that they will lock when they receive the transfer form, then you could send the form, and call daily to see if they've received it and have locked the rate, and only then break the existing CD, or just put the existing CD account number down as the source of the transfer, and give the existing custodian instructions to do an early withdrawal when they receive the form (or just do whatever existing custodian recommends to facilitate the transfer).

I personally decided not to hassle with breaking existing CDs to get this rate. Did my first buy with proceeds from a matured Ally CD in February, did another one from matured Ally CD in July, and have my third in process now from Ally CD that matured earlier this month (funds came out of Ally account a few days ago--took almost 2.5 weeks from mailing the transfer form to AFCU). So I decided to gamble on the rate holding until I had enough CDs mature to get close to the NCUA insurance limit, factoring in compound interest for seven years, and will be close to that when the third transfer is finalized. Just amazing that this rate has held for so long.

Kevin
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

It will take roughly 1.5 years to break even. Divide the penalty by the rate differential to get this: 1.125 percent / 0.75 percent/year = 1.5 years. You can verify by entering 18 months as the time remaining until maturity in the DA calculator, then enter 19 months.

Kevin
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sport
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Re: Should I terminate CD to get a better rate?

Post by sport »

The penalty is 6 mo. interest which is one half of a year. The rate is 2.25% per year. Therefore, the penalty will be 1.125% of the account balance. For example, if the CD balance is $10000, then the penalty will be $112.50.
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

It seems like the simplest logical step when choosing CDs with equivalent EWPs of 6 months or less and equivalent yields would be to go for the one with the highest yield possible regardless of maturity, since the movement of interest rates is difficult to accurately predict, correct?

The exception might be if one with only a slightly lower yield had a much lower maturity period, eg a 3% APY 84 month vs a 2.75% APY 36 month (or if you definitely needed the money by a specific time).

Longer maturity also provides you with more flexibility (you can break it any time rather than being forced to find a new investment at a given, sooner date), and less hassle.
Last edited by protagonist on Tue Aug 30, 2016 4:02 pm, edited 1 time in total.
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Kevin M wrote:It will take roughly 1.5 years to break even. Divide the penalty by the rate differential to get this: 1.125 percent / 0.75 percent/year = 1.5 years. You can verify by entering 18 months as the time remaining until maturity in the DA calculator, then enter 19 months.

Kevin

If I broke a 10K certificate at 2.25% APY/ 6 mo EWP today, and invested 10K in a 3% APY/6 mo EWP, and then broke the new CD 12 months later I would have lost $ 112.50 and gained $150, for a $37.50 profit.

On the other hand, if I kept the 2.25% 10K certificate to maturity in 10 months, bought a 3% certificate, and then broke the 3% certificate 2 months later I would have saved the $112.50 EWP and would have gained zero on the 10K certificate, so in total, I would come out 112.50-37.50= $75 ahead. It would take me another 6 months to break even if I break the first CD now.

OK, yes, I get that.

Is there an online calculator that conveniently figures out the profitability of breaking a CD and buying another?
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Kevin M wrote:First thing you can do is plug your numbers into When to Break a CD Calculator - Is the improved interest worth an early withdrawal penalty? at DepositAccounts.com. When I do this, it tells me that I should not break the CD. The reason is that the 0.75% differential in rates is not enough to make up for the 1.125% penalty in 10 months. But that's not the end of the analysis.

Next I'd think about what I thought the chances were of a 5-year or 6-year 3% rate being available when the current CD matures in 10 months. Personally I'd bet against it, so this would favor breaking and reinvesting at the higher rate. The prevailing sentiment is that rates will be low for a long time, so locking in 3% for seven years probably is a good move. Of course the prevailing sentiment could be wrong, but the EWP of only 180 days of interest is gold for such a long-term CD, and that greatly reduces the risk of betting on continued low rates.

Finally, you have to gamble that the rate will not drop between the time you break your existing CD and pay the penalty and when the IRA transfer process is complete or whenever you lock the rate--there have been reports that Andrews FCU will lock the rate when they receive your transfer form, although they told me "no" when I asked before doing my first transfer in February.

If you get a guarantee that they will lock when they receive the transfer form, then you could send the form, and call daily to see if they've received it and have locked the rate, and only then break the existing CD, or just put the existing CD account number down as the source of the transfer, and give the existing custodian instructions to do an early withdrawal when they receive the form (or just do whatever existing custodian recommends to facilitate the transfer).

I personally decided not to hassle with breaking existing CDs to get this rate. Did my first buy with proceeds from a matured Ally CD in February, did another one from matured Ally CD in July, and have my third in process now from Ally CD that matured earlier this month (funds came out of Ally account a few days ago--took almost 2.5 weeks from mailing the transfer form to AFCU). So I decided to gamble on the rate holding until I had enough CDs mature to get close to the NCUA insurance limit, factoring in compound interest for seven years, and will be close to that when the third transfer is finalized. Just amazing that this rate has held for so long.

Kevin
VERY helpful as usual, Kevin. Thanks.

Fortunately the decision is not crucial....the amount invested is not huge (21K initial investment), so either way it won't make a big difference. My main motivation in this thread is to learn how to think these things through critically. You have helped a lot. Thanks.

I have a much larger 3% CD with the same institution (North Country FCU) maturing in April, 2017 and I can only hope that the Andrews deal will still be on the table, or something similar will replace it.
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

protagonist wrote: If I broke a 10K certificate at 2.25% APY/ 6 mo EWP today, and invested 10K in a 3% APY/6 mo EWP, and then broke the new CD 12 months later I would have lost $ 112.50 and gained $150, for a $37.50 profit.

On the other hand, if I kept the 2.25% 10K certificate to maturity in 10 months, bought a 3% certificate, and then broke the 3% certificate 2 months later I would have saved the $112.50 EWP and would have gained zero on the 10K certificate, so in total, I would come out 112.50-37.50= $75 ahead. It would take me another 6 months to break even if I break the first CD now.
I think it's too crazy to think too far past breaking one CD to buy another one at a higher yield. Once you've done that, the EWP is a sunk cost, and future decisions should be forward-looking based on the new reality. If an even better CD comes along, then you go through the same thinking, and make the decision on what will earn the most over whatever timeframe you're looking at. Maybe you would have done better by holding onto CD #1 a little longer and going straight to CD #3, but since at the time you made the decision to go from CD #1 to CD #2, CD #3 did not exist, so you could not factor it into your analysis.

I used to get bogged down in thinking like this, but the opportunity plus need to break CDs to reinvest at higher rates have been few and far between over the last six years, and when there were obvious opportunities (as in pretty much any CD offering 3%), then nothing better has come along after that. Other than breaking a few 2% CDs to invest in the PenFed 3% CDs a few years ago, I've been fortunate in that I've had CDs mature whenever there has been a really good CD deal available. Tends to work out that way after building a CD ladder over a few years, even if the rungs of the ladder are very uneven. Do feel very lucky with respect to the Andrews FCU rate holding for so long though.

If you are going to work through these multi-step scenarios, don't forget to subtract the EWP from the investment in the new CD, and don't forget that the new CD also may have a penalty that eats into principal if you do an early withdrawal too soon (unlike PenFed, which is unusual in this respect). I didn't try too hard to parse your scenarios, but I'm not sure you factored these things in. I used a spreadsheet when working out these scenarios in the past.
protagonist wrote:Is there an online calculator that conveniently figures out the profitability of breaking a CD and buying another?
Did you write this before checking out the DA calculator I linked to above? Of course as I said, running it through this calculator is only the first step in the analysis I'd do.

Kevin
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stlutz
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Re: Should I terminate CD to get a better rate?

Post by stlutz »

Kevin M: Since you follow CDs a lot more closely than I do, I'm curious what your response would be to the following thinking (i.e. I'm phrasing a question as a statement):

If you are looking to break a single CD, you probably screwed up when you bought it in the first place. Unusually high rates pop up frequently enough that you should just keep your power dry if you don't see one. That is, if the best rate can you can find right now is 2%, then just keep the money in a savings account at 1%. Odds are in the next 6 months or so a rate like 2.75% will pop up. Does the OP need to worry here about whether the specific Andrews CD will be available a year from now? If it's not, something else will pop up, even if he has to wait a few months.
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Kevin M wrote:
protagonist wrote: If I broke a 10K certificate at 2.25% APY/ 6 mo EWP today, and invested 10K in a 3% APY/6 mo EWP, and then broke the new CD 12 months later I would have lost $ 112.50 and gained $150, for a $37.50 profit.

On the other hand, if I kept the 2.25% 10K certificate to maturity in 10 months, bought a 3% certificate, and then broke the 3% certificate 2 months later I would have saved the $112.50 EWP and would have gained zero on the 10K certificate, so in total, I would come out 112.50-37.50= $75 ahead. It would take me another 6 months to break even if I break the first CD now.
I think it's too crazy to think too far past breaking one CD to buy another one at a higher yield. Once you've done that, the EWP is a sunk cost, and future decisions should be forward-looking based on the new reality. If an even better CD comes along, then you go through the same thinking, and make the decision on what will earn the most over whatever timeframe you're looking at. Maybe you would have done better by holding onto CD #1 a little longer and going straight to CD #3, but since at the time you made the decision to go from CD #1 to CD #2, CD #3 did not exist, so you could not factor it into your analysis.

I used to get bogged down in thinking like this, but the opportunity plus need to break CDs to reinvest at higher rates have been few and far between over the last six years, and when there were obvious opportunities (as in pretty much any CD offering 3%), then nothing better has come along after that. Other than breaking a few 2% CDs to invest in the PenFed 3% CDs a few years ago, I've been fortunate in that I've had CDs mature whenever there has been a really good CD deal available. Tends to work out that way after building a CD ladder over a few years, even if the rungs of the ladder are very uneven. Do feel very lucky with respect to the Andrews FCU rate holding for so long though.

If you are going to work through these multi-step scenarios, don't forget to subtract the EWP from the investment in the new CD, and don't forget that the new CD also may have a penalty that eats into principal if you do an early withdrawal too soon (unlike PenFed, which is unusual in this respect). I didn't try too hard to parse your scenarios, but I'm not sure you factored these things in. I used a spreadsheet when working out these scenarios in the past.
protagonist wrote:Is there an online calculator that conveniently figures out the profitability of breaking a CD and buying another?
Did you write this before checking out the DA calculator I linked to above? Of course as I said, running it through this calculator is only the first step in the analysis I'd do.

Kevin
Yes, I did.
Like I said, the amount at stake here is relatively low....it was more of an exercise for me to understand what to do.

Thanks for the link.

The other one that matures in April is much larger, but I am already getting 3% in that one. Hopefully Andrews will hold out with their rates, or something else will pop up by then.

I will probably not break the 2.25% CD....just take my chances. It's not enough money to obsess over.
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Re: Should I terminate CD to get a better rate?

Post by in_reality »

Rob5TCP wrote:
in_reality wrote:The interest penalty is tax deductible too!

At one time it was line 30 of your Form 1040.

Early-withdrawal penalties are Box 2 of Form 1099-INT.

Times may have changed....
These are IRA only CD's so I don't know that any tax deduction would be applicable.
Bad on me for not reading better. Sorry for having taken your time.
Last edited by in_reality on Tue Aug 30, 2016 9:12 pm, edited 1 time in total.
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

stlutz wrote:Kevin M: Since you follow CDs a lot more closely than I do, I'm curious what your response would be to the following thinking (i.e. I'm phrasing a question as a statement):

If you are looking to break a single CD, you probably screwed up when you bought it in the first place. Unusually high rates pop up frequently enough that you should just keep your power dry if you don't see one. That is, if the best rate can you can find right now is 2%, then just keep the money in a savings account at 1%. Odds are in the next 6 months or so a rate like 2.75% will pop up. Does the OP need to worry here about whether the specific Andrews CD will be available a year from now? If it's not, something else will pop up, even if he has to wait a few months.
The great deals don't seem common enough that I would do this. The last really great deal was PenFed 5-year or 7-year at 3% a few years ago; it was not limited to IRA only, and no balance cap. The Andrews FCU deal is IRA only, so essentially $250K less seven years interest as a cap (easy to get much more federal deposit insurance in a taxable account). There was a great 3-year deal at 3% last year but capped at $100K; a good feature was that you could add to it up to $100K, so I was able to add to it as CDs matured over a few months. Then there was a 2-year 2.25%, but also capped at $100K. I managed to get two of them, one as an existing credit union member referring my fiance. Next best was 2.5% a few months ago, also at a credit union.

So one thing you have to be willing to deal with is to join multiple credit unions to get the best deals. This is a huge PITA for some, but I find it not to be a big deal at all. Once I'm in and I have the CD, it's just another entry in my portfolio spreadsheet for the next five years or whatever the CD term is.

Some good rates come with huge early withdrawal penalties, which eliminates one of the attractive features of good direct CDs. Lately rates are falling and/or EWPs are increasing (e.g., from six months of interest to one year of interest), so a 7-year CD at 3% with an EWP of 180 days of interest is just killer in the current environment; it's more than double the 7-year Treasury rate of 1.44% as of today, and with much less term risk due to the small EWP.

Kevin
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protagonist
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Kevin M wrote: The great deals don't seem common enough that I would do this. The last really great deal was PenFed 5-year or 7-year at 3% a few years ago; it was not limited to IRA only, and no balance cap. The Andrews FCU deal is IRA only, so essentially $250K less seven years interest as a cap (easy to get much more federal deposit insurance in a taxable account). There was a great 3-year deal at 3% last year but capped at $100K; a good feature was that you could add to it up to $100K, so I was able to add to it as CDs matured over a few months. Then there was a 2-year 2.25%, but also capped at $100K. I managed to get two of them, one as an existing credit union member referring my fiance. Next best was 2.5% a few months ago, also at a credit union.

So one thing you have to be willing to deal with is to join multiple credit unions to get the best deals. This is a huge PITA for some, but I find it not to be a big deal at all. Once I'm in and I have the CD, it's just another entry in my portfolio spreadsheet for the next five years or whatever the CD term is.

Some good rates come with huge early withdrawal penalties, which eliminates one of the attractive features of good direct CDs. Lately rates are falling and/or EWPs are increasing (e.g., from six months of interest to one year of interest), so a 7-year CD at 3% with an EWP of 180 days of interest is just killer in the current environment; it's more than double the 7-year Treasury rate of 1.44% as of today, and with much less term risk due to the small EWP.

Kevin
This post makes me wonder whether I should break the CD and go for it after all....but as per above, I'm not sure it is worth the hassle for an investment under $25K. I probably won't.

I got a 57 mo. CD at 2.57% at Pioneer Valley FCU in 2/16 (easy for anybody to get but no longer available), as well as the Andrews deal you mentioned last month, and the Penfed deal you mentioned in 2014......all within the last couple of years. And there were others that I missed between 2.5-3% in the interim. So I am not so sure decent offers are that rare- they just take diligence and luck with timing (or lots of spare cash). Then again, it is painful to watch large amounts of cash gather ~1% interest for long while one waits.

Recently I have been depositing extra cash in banks with lucrative promotional deals on the order of $300-500 bonus within 3-4 months with deposits of $15000-50000 or so. (Chase, Citi, Capitalone, TD Bank over the past few months have had such offers). Much better than any CD rate for sure, and there are plenty such deals going around. I just opened one today- $15K deposit at Citi with a $400 bonus after 3 months or so. The problem is they are limited to short terms and subject to longer waiting periods before you can repeat. Plus accounting hassles. I have been using them as places to park cash, hoping that another great CD will pop up in 3 or 4 months' time.
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

protagonist wrote: Recently I have been depositing extra cash in banks with lucrative promotional deals on the order of $300-500 bonus within 3-4 months with deposits of $15000-50000 or so. (Chase, Citi, Capitalone, TD Bank over the past few months have had such offers). Much better than any CD rate for sure, and there are plenty such deals going around.
Yes, I did three of these last year after opening the NWFCU 3-year 3% add-on CD with much less than the $100K cap, since they all came out to more than 3%/year. Then as I met the time-period requirement, I moved the money into the NWFCU CD until I hit the $100K max. I've been too lazy to do any more since then.

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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

protagonist wrote: So I am not so sure decent offers are that rare- they just take diligence and luck with timing (or lots of spare cash). Then again, it is painful to watch large amounts of cash gather ~1% interest for long while one waits.
OK, you may be right. This motivated me to solve for the breakeven time, b, to wait at a given savings rate, s, and then invest at a higher CD rate, c2 vs. investing now at a lower CD rate, c1, with a term of t years. Start with this equation:

(1+s)^b * (1+c2)^(t-b) = (1+c1)^t

Using some algebra with exponent rules, this can be written as:

((1+s)/(1+c2))^b = ((1+c1)/(1+c2))^t

Taking the log base (1+s)/(1+c2) of both sides to solve for b, this spreadsheet formula gives breakeven time b in years:

b = LOG( ( (1+c1)/(1+c2) )^t, (1+s)/(1+c2) )

Here are some representative breakeven times for a 5-year term:

Code: Select all


  s     c1    c2   b    b(months)
----- ----- ----- ----  ---------
1.00% 2.00% 2.25% 1.00  11.94
1.00% 2.00% 2.50% 1.66  19.90
1.00% 2.00% 2.75% 2.13  25.59
1.00% 2.00% 3.00% 2.49  29.85
So if you're looking at a 5-year 2% CD, it pays to wait up to a little less than a year if you think you'll find a 2.25% CD in that timeframe, and as much as almost 2.5 years if you think you'll find a 3% CD in that timeframe.

I should note that I have been willing to sit in a low-yield savings account for at least a couple of months waiting for a good CD deal, but clearly it's worth waiting much longer if you're fairly confident that a good enough CD deal will become available. I'll also note that my average yield premium over Treasuries has increased if I look only at my open CDs compared to all CDs I've purchased over the last six years. For open CDs average yield premium is 1.32% (1.27% if weighted by CD value) vs. a yield premium of 1.15% (1.21% weighted) for all CDs purchased over last six years. This reflects investing in primarily good CD deals over the last year or so; average yield premium for CDs purchased within the last year is 1.67%.

My first purchase of the Andrews FCU 3% CD actually was with cash that had been sitting in a PenFed IRA savings account that was from proceeds of a PenFed CD that matured on 12/15/2015 (PenFed rates have been so lousy lately that there's no way I'd buy a PenFed CD). The savings rate at PenFed was only 0.05% (from my statement) and the 5-year CD rate at that time was 1.51% (from DepositAccounts.com). Plugging these numbers into the formula above, the breakeven time to wait for a 3% CD would have been 30 months. Fortunately I only had to wait about two months from the PenFed CD maturity date of 12/15/2015 until I transferred to my first Andrews FCU CD in February 2016.

As a side-note, how things have changed at PenFed! I still have a 7-year Roth IRA CD there at 3.49% APY, which unfortunately matures on 4/28/2018. If I price this conservatively using the 2-year Treasury yield of 0.8% (CD has 1.65 years left to maturity), I get a price of 104.41 (so 4.41% over par). This is the CD-equivalent of the "roll return" or "roll yield" that people like to talk about for bond funds. No, I can't get that price by selling the CD, but for a rolling ladder of CDs or bonds held to maturity, the "roll return" effect shows up in both (EDIT: since everything matures at par, "roll return" for a rolling bond or CD ladder essentially comes from getting the higher yield of the longest-term security in the ladder over the life of that security).

EDIT: Some might say I should be using a 1.65-year CD rate instead of a Treasury rate to price the CD. I could get an 18-month CD at a CU I'm a member of for 1.40%, which happens to be the top rate I see at DA.com for an 18-month CD. Using this yield the PenFed CD prices out at 103.40, so 3.4% over par instead of 4.4% over par--still very nice, and still showing the "roll return" effect on top of much higher yields than Treasuries.

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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Kevin M wrote: So if you're looking at a 5-year 2% CD, it pays to wait up to a little less than a year if you think you'll find a 2.25% CD in that timeframe, and as much as almost 2.5 years if you think you'll find a 3% CD in that timeframe.

I should note that I have been willing to sit in a low-yield savings account for at least a couple of months waiting for a good CD deal, but clearly it's worth waiting much longer if you're fairly confident that a good enough CD deal will become available.
Thanks for the info, Kevin!

This all makes sense if you think you have a good chance of guessing correctly.

The downside, obviously, is waiting it out and then finding out you were wrong. Lately my guessing has not been so good. I had a bunch of CDs mature this past January, and in the wake of the Fed announcement that they were going to begin raising rates 0.25% per quarter for 3 years. I thought CD rates would rise, but just the opposite has happened since. Fortunately I found a decent product and invested most of the money at 2.57% (Pioneer Valley FCU- I think I told you about that one at the time, no longer available). But I still have cash waiting to be invested, and that drove me to play the bank promotion game (which is pretty lucrative, but a bit of a hassle and only good for 3 months or so), and the high yield debit card game (which has pretty much dried up). That said, I still have about 60K earning only 1.06%, and will have more when the bank promos run out.
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

protagonist wrote:Lately my guessing has not been so good.
Hmm, so now you're arguing the other side?
protagonist wrote:I had a bunch of CDs mature this past January
I had a bunch of taxable Ally CDs mature between September and November 2015, the large PenFed IRA CD in December (source of first transfer to Andrews FCU IRA CD in February), a few relatively small Ally taxable CDs in Jan and Feb, and then the two Ally IRA CDs in July and August (transfers #2 and #3 to Andrews FCU IRA CD). The last of my Ally IRA CDs mature in the next couple of weeks, and now that I'm bumping up against the NCUA deposit-insurance limit at Andrews, I'll be looking for another good IRA CD deal at a bank or credit union where I'm not already maxed out on deposit insurance.
protagonist wrote:, and in the wake of the Fed announcement that they were going to begin raising rates 0.25% per quarter for 3 years. I thought CD rates would rise, but just the opposite has happened since.
I guess you missed or disagreed with my posts last year about the possible Fed rate increases and likely (non)-impact on rates other than the shortest term. The federal funds rate (FFR) only has direct impact on very short-term bond yields. Other yields are primarily determined by the health of the overall economy, which of course is hard to predict. Good CDs seem to dance to an even slightly different tune, so also hard to predict, but likely to have more connection to Treasury yields of same maturities than to the FFR.
protagonist wrote:Fortunately I found a decent product and invested most of the money at 2.57% (Pioneer Valley FCU- I think I told you about that one at the time, no longer available).
Yes, that was a good one. My similar one was a 5-year 2.50% at Patelco CU in early March, but it was a relatively small portion of the proceeds from my taxable Ally CDs that matured in late 2015. Other uses of the matured CD proceeds were buying a very expensive car in November 2015, and doing some rebalancing into international stocks. I still have a pretty health cash stash, but still have a child in college, have another child getting married soon, and otherwise am pretty comfortable with some cash earning 1% with the 3-year Treasury rate below 1% and the 5-year Treasury rate not much above that (below 1.2%): Daily Treasury Yield Curve Rates.
protagonist wrote:But I still have cash waiting to be invested, and that drove me to play the bank promotion game (which is pretty lucrative, but a bit of a hassle and only good for 3 months or so), and the high yield debit card game (which has pretty much dried up). That said, I still have about 60K earning only 1.06%, and will have more when the bank promos run out.
Think of it as short-term bonds with a much better return/risk profile than Treasuries.

I probably already have mentioned this to you, but I see that Mountain America CU still has a 5-year at 2.30% APY, so per my calculations above, if you buy something like this in the next few months, you'll still come out ahead of having bought a 2% CD in January. With the bellwether CD rates falling and EWPs increasing, a 5-year at 2.30% is pretty good, even with the EWP of 365 days of interest (increased from 180 days of interest in August 2014): MACU membership_agreement.pdf.

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Re: Should I terminate CD to get a better rate?

Post by protagonist »

Kevin M wrote:
protagonist wrote:Lately my guessing has not been so good.
Hmm, so now you're arguing the other side?
I'm not arguing. I'm just a bozo on this bus.
I guess you missed or disagreed with my posts last year about the possible Fed rate increases and likely (non)-impact on rates other than the shortest term.
No, I didn't disagree or miss it. I was just being hopeful. In the long run, I suppose we are better off with low inflation and low rates. Like you said, yields are hard to predict....my impression is that banks are so awash in money they don't need to raise yields.
I probably already have mentioned this to you, but I see that Mountain America CU still has a 5-year at 2.30% APY
I missed that one, Kevin, but thanks. For now I think I will wait it out at least until my bank promos materialize in a few months and see what is available. I'll feel more pressure to invest then. For now I will live with the 1.06% on residual cash unless something great pops up. Mostly I am just getting lazier. Opening and managing all these accounts is a pain in the neck.
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Re: Should I terminate CD to get a better rate?

Post by Rob5TCP »

I've cancelled 2 CD's to switch to this offer. One was from Synchrony 2.2% with a 6 month EWP (in the second year) and one was from Melrose 2nd year of a 2 year CD (1 year penalty, but a much lower interest rate). The third one was five years at 2.5% but a 1 year EWP plus interest is lowered to the current rate of their standard savings account (about .4%).

Obviously, the third one's penalties were too severe to justify ending the account (especially since it's .5% difference.
Kevin has given some good food for thought on calculating whether it pays or not.
I've had good experiences with Andrews. My only beef: their password is 10 alphanumeric characters only with no two factor authentication.
When I called support they had no knowledge on 2FA and were unable to say when they might increase the strength of their passwords.
What is ironic, they have tons of online courses about online safety. Well, having a strong password should be one of them.
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Re: Should I terminate CD to get a better rate?

Post by jmk »

missedit wrote:
protagonist wrote:
Andrews FCU offers a 3% APY 84 month IRA certificate. They have offered it for quite awhile, but I have no idea if it will still be available when my other certificate matures in June, 2017.
can you provide a link? - all I am seeing is 1.9% for a 60 month CD
Same link you're looking at for the 1.91. But click the "IRA, Education" tab. That's the only place the 2.97% rate is found. You can't apply online like regular CDs, you have to use a paper form for IRAs!

Their web site is somewhat antiquated and quite frustrating compared to other banks like Synchrony. Whether that's worth the extra returns is up to you. (It was for me.)

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Re: Should I terminate CD to get a better rate?

Post by 209south »

Hmm...I don't have an answer to the OP question, but have one of my own...I have a substantial balance of Total Bond within my Roth IRA at Vanguard...the current yield on BND is 1.88% and I won't be touching that money for well over 7 years...seems it may be sensible to move part to this 3% 7 year CD...other than added portfolio complexity, any reason not to do this??
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Re: Should I terminate CD to get a better rate?

Post by protagonist »

209south wrote:Hmm...I don't have an answer to the OP question, but have one of my own...I have a substantial balance of Total Bond within my Roth IRA at Vanguard...the current yield on BND is 1.88% and I won't be touching that money for well over 7 years...seems it may be sensible to move part to this 3% 7 year CD...other than added portfolio complexity, any reason not to do this??
Not to my knowledge, but you might ask some people who are more into bond funds than I am. I am bearish on them.
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Re: Should I terminate CD to get a better rate?

Post by SpaceCowboy »

protagonist wrote:
209south wrote:Hmm...I don't have an answer to the OP question, but have one of my own...I have a substantial balance of Total Bond within my Roth IRA at Vanguard...the current yield on BND is 1.88% and I won't be touching that money for well over 7 years...seems it may be sensible to move part to this 3% 7 year CD...other than added portfolio complexity, any reason not to do this??
Not to my knowledge, but you might ask some people who are more into bond funds than I am. I am bearish on them.
I think good CDs are preferable to BND. However, you want to stay under the FDIC/NCUA limit to ensure that the full amount is insured. I'd question having CDs in Roth, and think you are better putting them in either tax deferred tIRA or 401, or even a taxable account. Roth should be used for higher growth assets or highly tax inefficient ones like REITs.
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Re: Should I terminate CD to get a better rate?

Post by LadyGeek »

The wiki has some background info: Comparing CDs

In 2011, I jumped on a 3.49% 7-year CD offer. Instead of a single 7-year CD, I purchased 7 x 7-year CDs, each CD at 1/7th the amount. This was a hedge against rising interest rates.

If rates rose, I only needed to break a single CD and start the ladder. If rates fell, I did nothing. I still have 7 x 7-year CDs.

The downside is tracking 7 CDs in Quicken.

=======================
I was happy that my Mom just got a 48 - 53 month CD at 1.55% from her local brick and mortar bank.* She needs "simple and safe" so everything she has is in the local bank + Vanguard. Going elsewhere is not on the table.

My Mom is a "premier" customer and gets higher rates than publicly advertised. Anyone who has an elevated customer status and is looking for a CD should check with their bank directly - don't depend on the website.

* This bank offers CDs with variable maturity dates. They'll call the CD any time from 48 to 53 months at their discretion.
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Re: Should I terminate CD to get a better rate?

Post by mouses »

LadyGeek wrote:The wiki has some background info: Comparing CDs

In 2011, I jumped on a 3.49% 7-year CD offer. Instead of a single 7-year CD, I purchased 7 x 7-year CDs, each CD at 1/7th the amount. This was a hedge against rising interest rates.

If rates rose, I only needed to break a single CD and start the ladder. If rates fell, I did nothing. I still have 7 x 7-year CDs.

The downside is tracking 7 CDs in Quicken.

=======================
I was happy that my Mom just got a 48 - 53 month CD at 1.55% from her local brick and mortar bank.* She needs "simple and safe" so everything she has is in the local bank + Vanguard. Going elsewhere is not on the table.

My Mom is a "premier" customer and gets higher rates than publicly advertised. Anyone who has an elevated customer status and is looking for a CD should check with their bank directly - don't depend on the website.

* This bank offers CDs with variable maturity dates. They'll call the CD any time from 48 to 53 months at their discretion.
Your Mom should be dealing with a local brick and mortar credit union. Most in my area are offering 2+% on five year CDs.
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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

209south wrote:Hmm...I don't have an answer to the OP question, but have one of my own...I have a substantial balance of Total Bond within my Roth IRA at Vanguard...the current yield on BND is 1.88% and I won't be touching that money for well over 7 years...seems it may be sensible to move part to this 3% 7 year CD...other than added portfolio complexity, any reason not to do this??
I would do it in a heartbeat, with the only caveat that there's a risk that the rate could drop before the transfer is complete. Some have reported that Andrews will lock the rate when they receive your transfer form, so you could join, complete the form, mail it, and then call them in about a week to see if they've received the form and locked the rate. If so, tell them to proceed, if the rate has dropped, tell them to cancel it. Also, there's a notification in the online form process that says if the CD you select is not available, they will notify you so you can select a different product, but I don't know if they'd do this before sending the form to Vanguard.

Also, be prepared for some challenges if you're not used to joining credit unions with somewhat antiquated web interfaces. I find it to be a piece of cake, but others find it to be a deal breaker.

For an extensive discussion about the trade-offs between CDs and bond funds, see any of my thousand(s) of posts here, or you could look at this blog post: CD 5-Year Report Card: Part 2 (Risk and Return).

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Re: Should I terminate CD to get a better rate?

Post by Kevin M »

LadyGeek wrote: In 2011, I jumped on a 3.49% 7-year CD offer. Instead of a single 7-year CD, I purchased 7 x 7-year CDs, each CD at 1/7th the amount. This was a hedge against rising interest rates.

If rates rose, I only needed to break a single CD and start the ladder. If rates fell, I did nothing. I still have 7 x 7-year CDs.
This sounds like a PenFed CD; I have the exact same CD purchased in 2011 at PenFed. PenFed allows partial withdrawals, so using multiple CDs is not necessary for this purpose as it is at many other banks and credit unions. When I started I opened multiple CDs at Ally Bank for this reason, but after the first few months of this, I stopped bothering, since I was essentially building a CD ladder over time with each rung being larger.

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Re: Should I terminate CD to get a better rate?

Post by LadyGeek »

Yes, it's a PenFed CD. At the time, I didn't see this option. Thanks for the info.
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