It pays to ask
I had a CD maturing last week. One of those I was Laddering over 5 years, since the fall of 1987. Wanted to put it into a 5 year CD at the best rate I could find. Had found a great rate of 3.75% at www.Mechanics-Coop.com but when maturity date came the rate had been dropped to 3.50% two days before. I asked branch manager for the higher rate, he made a call, and I was given the higher interest rate. That was a 7% improvement in the rate of return on this CD.
Lesson learned, ask and maybe you shall receive.
Best rates may be in your backyard
Several of my recent CD investment decisions have benefited from a search of local community institutions. Although the Best Rate services gather a tremendous amount of rate data they sometimes miss community banks and credit unions. These smaller organizations can be an excellent choice. You may have to visit them in person to open the account, but you could find some really good deals.
For example, Mechanics Cooperative Bank, Taunton, MA offered a 3.75% APY on a 5 year CD in early August, 2009.
Let me know if you have found similar opportunities in your local communities.
Many community banks and credit unions have stuck to the basics of their business. They are sometimes willing to pay a little above the going local market rates.
When Rates Are Up
When the interest rate trend is upward it is best to switch to having the interest on your CD portfolio reinvested in new CD's instead of being compounded into the existing CD's. This allows you to take advantage of higher rates each time interest is paid on your existing CD investments. A portion of you portfolio in a laddered CD structure is also always coming up for renewal. This allows you to take advantage of the higher rates without having to get out of a single CD investment whose maturity is well into the future.
CD Rates and Insurance
How Banks & Credit Unions Set CD Rates
Financial institutions set their rates base on their need for deposits and the rates set by competitors. They may anticipate that rates will be going down further and want deposits that will quickly re-price downward (i.e.; short term CD's) so the most attractive rate they offer will be of a short duration. If they think that rate might be going up they will get aggressive with longer term rates to try and lock in deposits at a fixed rate that will soon be eclipsed by the market.
Bottom line is that their motives and your motives are not always the same. Shop around for the best rates you can find and take the time to make you investments wisely. Banker's look at CD deposits as "hot money" that will leave them when the next better deal comes along. They don't expect you to be loyal to an organization. Shop rates!
Federal Deposit Insurance
Historically the Federal Deposit Insurance Corporation has insured deposits by an individual up to $100,000. The FDIC provides this insurance with the full support of the United State Government. Today those deposits have had the amount of insurance increased to $250,000 per individual. Another organization provides the same insurance for credit unions. It is the NCUA and is also a government agency.
It is important to remember that this insurance applies to all the funds you have on deposit with each financial institution. So if you have CD's, a savings account and a checking account at the same bank or credit union they are all added together to determine the insured amount.
The FDIC has an explanation of this program at
http://www2.fdic.gov/dip/index.asp
The NCUA site is
http://www.ncua.gov/default.aspx
Other Insurance
Some financial institutions provide additional insurance coverage to protect your deposits beyond the amounts covered by the federal programs. In Massachusetts the DIF provides additional coverage for banks and the MSIC provides coverage for credit unions.
When Rates Are Down
Laddered CD's do extremely well when interest rates are going down. This is also a time when the economy may not be doing to well. If you have a 5 year ladder set up in this environment only 1/5th of your investment will be re-pricing at the current lower rates and 4/5th will stay at the higher earlier rates. Thus you end up dulling the effect of falling CD interest rates. Also, if you continue the ladder strategy you will be looking to replace that maturing CD with a long term CD which should offer a higher rate of return then a short term investment.