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Understanding Long-Term and Short-Term CDs: Which is Right for You?

When shopping for a certificate of deposit (CD), you might encounter terms ranging from a few months to several years. So, which option is best? It depends on your goals and when you need to access your savings. Here, we explore the pros and cons of long-term and short-term CDs and how to choose the right one for you.

What Is a Long-Term CD?

Long-term CDs generally refer to CDs with terms that last three years or longer. Typically, long-term CDs provide a higher annual percentage yield (APY) than short-term ones. However, they tie up your money for an extended period, and early withdrawals can result in fees. Additionally, if market interest rates increase while your money is locked in a long-term CD, you might miss out on better yields elsewhere.

Pros of Long-Term CDs

• High returns: Long-term CDs typically offer a higher yield than traditional savings accounts, money market accounts, and short-term CDs.
• Security: Deposits in CDs at institutions insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA) are insured up to $250,000 per depositor, per account ownership category.
• Wide availability: Long-term CDs are available from many financial institutions, including brick-and-mortar banks, online banks, and credit unions.

Cons of Long-Term CDs

• Early withdrawal penalties: Withdrawing money before the term ends can result in penalty fees.
• Deposit limitations: Minimum deposit requirements can vary, with some accounts requiring $1,000 or more.
• Interest risks: If savings account yields increase before your CD matures, you won’t benefit from those higher rates.

What Is a Short-Term CD?

Short-term CDs have terms that last from three months to a year or slightly longer. They are ideal for depositing cash you need for near-term goals. While they typically offer lower returns than long-term CDs, banks may offer promotional rates on shorter-term CDs to attract new customers. Like long-term CDs, short-term CDs may have early withdrawal fees.

Pros of Short-Term CDs

• Better returns for short-term savings: Short-term CDs may offer higher yields than traditional savings accounts or money market accounts.
• Short maturity timelines: These CDs can mature in less than a year, giving you quicker access to your initial deposit and interest earnings.
• Deposit insurance: Like long-term CDs, short-term CDs are often protected by deposit insurance, insuring up to $250,000 per depositor and per account ownership category at each financial institution.
• Wide availability: Short-term CDs are available from many financial institutions, including traditional banks, online banks, and credit unions.

Cons of Short-Term CDs

• Lower APYs: Short-term CDs may offer lower APYs than longer-term CDs.
• Early withdrawal penalties: Withdrawing money before the CD matures will incur a penalty.

How to Choose the Right CD Term for You

Short-term CDs are best for near-term goals, while long-term CDs are better for long-term savings. For example, if you have cash saved for a move in three months, a short-term CD could be a good place to park that money. Conversely, a long-term CD might be suitable for savings you don’t need for several years, such as a down payment on a house.

Consider setting up a CD ladder to maximize the benefits of both short- and long-term CDs. For instance, if you have $5,000, you could put $1,000 into five different CDs with varying maturity dates. This strategy allows you to take advantage of different interest rates and access your money at different times.

Alternatives to CDs

CDs are just one way to earn interest on savings. Here are some alternatives:

• High-yield savings accounts: These accounts offer higher yields than regular savings accounts and allow regular deposits and withdrawals without early withdrawal fees.
• Money market accounts: These accounts may provide higher interest rates and offer debit cards and checkbooks for ATM withdrawals or payments.
• Bonds: Bonds can provide regular income through interest payments until they mature. However, they come with some risk, as issuers may default on interest payments.

The Bottom Line

When deciding between a short-term and long-term CD, consider your goals. Short-term CDs are likely better for near-term needs, while long-term CDs are suitable for money you don’t plan to touch for many years. If your goals are unclear, consider opening several CDs with different terms to take advantage of the benefits both types offer.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions for your future.

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