Many banks find it less expensive to sell their CDs through securities firms rather than to have branches in each town. These brokered CDs are often callable CDs with long terms. Although FDIC-insured, they have features you must understand. Before you jump at the rate offered by some ad in the Sunday newspaper, here’s what you need to know about the features offered:
High Rate: The high rate could be temporary. Most callable CDs are callable after a year or two, which means you can get paid back and your high rate evaporates. But if rates rise, you could be locked into a 15- or 20-year CD, which does not look good if new rates are higher.
Callable: The bank can pay you your principal after the first or second year but is under no obligation to pay you back until maturity. Do not rely on some representative’s estimate of when you can expect your money, because the only assured payoff is at maturity.
Liquid: Yes, many banks will offer to resell the CD if you want to get out before the end of the term. But you could be forced to take a big discount for the liquidity.
Put at Death: You may be told that if you pass away before the CD matures, your heirs can “put” the CD back into the bank and get the principal. This offer, however, is dependent upon the bank having enough funds in the “put” pool, and your heirs could wait some time to see the cash.
As long as you understand what you are getting, these can be a very good deal. For example, a woman purchased a 15-year callable CD four years ago, paying 7.25%. She received a comfortable monthly income (with the security of FDIC insurance on the principal) until just recently, when the bank called her CD and paid back her initial deposit. She was happy with the outcome. To get a free checklist to use before buying a high rate or callable CD, click below for more information.