Jumbo certificates of deposit (CDs) allow savers to invest large sums of money securely, but they should be approached with more caution than traditional CDs.
Jumbo CDs have the same genetic composition but are heftier than their traditional cousins. They supply a fixed interest rate but require you to keep your money invested for a fixed term before the proceeds can be withdrawn without a penalty. The notable difference between jumbo CDs and traditional CDs comes straight from your pocket, and that is the amount of money needed to open them.
| Financial institution | Annual percentage yield | Term | Minimum deposit |
|---|---|---|---|
State Bank of Texas | 5.40% *special | 12 months | $50,000 |
My eBanc | 5.49% | Six months | $50,000 |
Finworth | 5.33% | 14 months | $50,000 |
All In Credit Union | 4.80% | Six months | $100,000 |
GTE Financial | 5.12% | 12 months | $100,000 |
Luana Savings Bank | 5.11% *special | 18 months | $100,000 |
Connexus Credit Union | 5.30% *special | 10 months | $100,000 |
Credit One Bank | 5.20% | 12 months | $100,000 |
Navy Federal Credit Union | 5.10% | 12 months | $100,000 |
What are jumbo CD rates?
Jumbo CDs, or negotiable CDs, were created in 1961 by the First National City Bank of New York, the forerunner of Citibank. Regular CDs may have a $1,000 minimum deposit, for example, but jumbo CDs generally need a deposit of around $100,000 upward to millions of dollars. Banks and credit unions use the jumbo CDs with their higher rates to draw large deposits from businesses, institutional investors and other wealthy clients. That money can then be lent at a higher interest rate to other clients.
Take the same precautions in selecting a jumbo CD as you would with a traditional one, only more so. Consider carefully whether you can spare for a fixed term period the amount you are going to invest. Jumbo CDs from federally insured banks and credit unions are insured for $250,000, per depositor, per bank or credit union, per ownership category, by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA), which will cover you if the financial institution fails. With a jumbo CD, make sure you do not exceed that amount.
Jumbo CDs can be set up as individual, joint or trust accounts. Joint accounts allow investors or business partners to open a CD together, while trust accounts can be used to preserve and grow wealth as well as to guard the financial security of future generations.
Early withdrawal penalties
Because jumbo CD deposits are larger than regular CD deposits, you may incur more of a loss if you have a monetary crisis and need to withdraw your funds early. Federal law requires depositors to pay a penalty of “at least seven days’ simple interest on amounts withdrawn within the first six days after deposit.”
Most banks require three to six months’ worth of interest on the amount withdrawn, depending on the CD’s term. Generally, the longer the term of the CD, the larger the penalty. Know the details of the bank’s early withdrawal penalty before committing.
The advantages and disadvantages of jumbo CDs
If you invest a considerable sum of money into a fixed-length account, you expect a larger return. Jumbo CDs usually provide a higher annual percentage yield (APY), which tells you the total amount of interest you can expect to earn per year, but do not take it for granted. With the Federal Reserve having increased the federal funds rate to a current range of 5.25%-5.50% during its latest rate-hiking cycle, which in turn has increased the APYs banks pay on CDs, some banks may offer regular CDs that pay as much or outperform a jumbo.
Jumbo CDs are not found at every bank or credit union on the corner, and the ones that do supply them are not necessarily flashing larger-than-life rates, either. Your search for a jumbo CD with generous returns may take longer than expected. Online banks are more likely to meet your needs as they generally offer higher rates on all CDs than traditional banks.
What to know before investing in jumbo CDs
An investor can also buy jumbo CDs through a broker, who buys them in bulk from banks and credit unions and markets them to its customers for a fee. The issuing banks or credit unions offer them higher-yielding CDs than they would to small savers.
Jumbo CD interest rates are decided by the term, the current interest-rate environment and the amount of the deposit. The term is the time that the funds are required to be kept in the account, which is usually from three months to 10 years. The amount of interest banks pay on deposits is also a factor.
Jumbo CD strategies
Although CD strategies are alike for most different types of CDs, individuals will vary in their uses for the jumbo variety. Because the amounts are larger, the jumbo CD investor may tend to be more strategic in placement. The approaches may include the laddering strategy, the income strategy and the growth strategy.
The CD laddering strategy spreads the investment over different terms to supply a balance between liquidity and earning potential.
The income strategy involves generating regular income by taking periodic payments rather than reinvesting the interest. Understand, however, that by electing not to reinvest a CD’s interest payments, the amount you earn over the term will not be equal to the stated APY, as APY takes into account compounding interest.
The growth strategy, on the other hand, takes advantage of compounding interest, or the process of earning interest on the interest you’ve already earned, by using longer-term jumbo CDs with higher interest rates to maximize their returns further out in time.
Frequently asked questions (FAQs)
Jumbo CD interest rates are set using the term, the current interest-rate environment and the amount of the deposit, among other factors. Remember that banks use the money you deposit into a CD account to lend to other clients at higher rates. The more you deposit and the longer you leave your money with the bank, the more opportunities the bank has to earn interest by lending it out.
In exchange, they typically compensate CD depositors by offering higher yields for longer terms and larger deposits. The amount of interest banks pay on deposits, depending on how well they can attract assets and their overhead costs, is also involved in setting the jumbo CD rate.
Jumbo CDs get their name because they require larger minimum deposits than standard CDs. An investor will likely need to invest a minimum of around $50,000 to open a jumbo, although each bank sets its own amount. Examine the details carefully. Banks usually pay higher rates for jumbo CDs, but that is not always the case. It may be possible for an investor to find a better rate on a regular CD at another bank.
Yes, you may be able to negotiate rates on jumbo CDs depending on how much you deposit, the term and the financial institution offering the CD. It doesn’t hurt to attempt to negotiate a better interest rate for your jumbo CD. The more money you plan to deposit, the better your chances of getting a better rate.
Do not expect much of an increase in APY, however, because the Federal Reserve is signaling interest rate cuts during the remainder of 2024, and that has slackened the market. It is best to negotiate with a bank with which you have a long-term business relationship. Don’t overlook online banks, though, as you may be able to get a better rate with them given their lower overhead costs.
CDs typically compound interest on a daily or monthly basis, which increases the earnings you receive over the CD term. If compounded monthly, the interest from the first month is added to the second month’s principal, and the total is compounded repeatedly each month until the CD matures.
With simple interest, the calculation is only done at maturation. Compound interest usually is done monthly, although some occur daily. The increased earnings are small in dollar terms unless the CD is paying an APY of 4.00% or 5.00% on a large deposit. The more often the interest compounds and the higher the interest rate, the more you will earn over the life of your CD.
