10-Nov-22 – Thousands of prospective Chicago home buyers may be left on the fence as mortgage rates bounce around the 7 percent bracket – a 20-year high. But today, thrifty money savers have smiles on their faces.

Many Chicago-area banks and brokerage firms now are paying super high interest rates up to 4 percent or more on certificates of deposit.

A certificate of deposit (CD) is a savings account that holds a set amount of money for a fixed period of time – such as six months, one year, or five years – and in exchange, the issuing bank pays interest, according to the United States Securities and Exchange Commission (SEC).

When you cash in or redeem your CD, you receive the money you originally invested plus any earned interest.

While CD interest rates of 4 percent sound like a great deal today, it is likely they will move higher in the coming months as the Federal Reserve continues to ratchet up its benchmark short-term funds rate to put a damper on inflation.

High CD rates also benefit senior citizens on fixed incomes. In the early 1980s, when 30-year fixed mortgage rates peaked at 18 percent, this writer’s parents placed their retirement nest egg of about $40,000 in a CD earning 15 percent at First Federal Savings & Loan in Chicago. The annual yield was $6,000, or $500 a month.

On November 4, the Fed funds rate was boosted three-quarters of a percentage point to a range of 3.75 to 4 percent. Meanwhile, the six-month Treasury yield was 4.44 percent, while two-year Treasuries were at 4.72 percent. The prime lending rate – the rate banks charge their most credit-worthy corporate customers – was 7 percent.

Another hot savings investment opportunity is the I-Bond, which currently provides an annual yield of 6.89 percent on a six-month bond with a maximum purchase of $10,000. I-Bonds must be held for at least one year.

If you redeem the I-Bond before holding it for five years, you’ll lose the last three months of earned interest. You must also pay federal tax on savings bonds when they are cashed. What makes I-Bonds attractive is the interest rate is boosted by the inflation rate under a complex financial formula.

What all this means is prospective home buyers have a short-term way to earn hundreds, maybe thousands of dollars for a down payment on the American Dream.

Let’s suppose you plant your $10,000 to $20,000 housing nest egg in a CD. Then sit back and watch it earn money. A spot survey by The Home Front found the following attractive CD rates currently being paid by local institutions and brokerage firms:

Certificates of deposit are considered to be one of the safest savings options, according to the SEC. A CD purchased through a federally insured bank is insured up to $250,000. The $250,000 insurance covers all accounts in your name at the same bank, not each CD or account you have at the bank.

As with all investments, there are benefits and risks associated with CDs, the SEC advises. The bank’s disclosure statement should outline the interest rate on the CD and say if the rate is fixed or variable. It also should state when the bank pays interest on the CD – for example, monthly or semi-annually – and whether the interest payment will be made by check or by an electronic funds transfer. And the maturity date should be clearly stated, as should any penalties for the “early withdrawal” of money in the CD.

The major downside with CDs is the risk that inflation will grow faster than your money and lower your real returns over time.

Brokered CDs offer higher rates and higher risk

Although most CDs are purchased directly from banks, many brokerage firms and independent salespeople also offer CDs.

These individuals and entities, known as deposit brokers, can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain number of deposits to the institution. The deposit broker can then offer these “brokered CDs” to their customers.

The SEC advises that savers should thoroughly check out the background of the issuer or deposit broker to ensure that the CD is issued by a reputable institution. Photo by Andy Dean

Deposit brokers are not licensed or certified, and no state or federal agency approves them. Since anyone can claim to be a deposit broker, always check to see if the deposit broker or the company he or she works for has a history of complaints or fraud.

Many deposit brokers are affiliated with investment professionals. You can check out their disciplinary history using the SEC’s online database at www.investor.gov. Your state securities regulator may have additional information.

To research the background of deposit brokers who are not affiliated with an investment firm, start by contacting your state’s consumer protection office.

Remember, if a deal seems too good to be true, it likely is.