More financial institutions are
offering certificates of deposit that have an element of flexibility.
If you're willing to sacrifice some yield, you can find CDs with
options that might better suit your financial needs.
Look for "bump-up, "liquid" or "no-penalty"
CDs.
Doin' the bump
Bump-up CDs allow you to take advantage of higher returns when
interest rates rise while you're stuck in the middle of a lower-rate
term.
Suppose you buy a two-year CD at a given rate. If
six months into the term, the bank offers its new customers a quarter-percent
more, a bump-up CD gives you the option of telling the bank you
want to get the higher rate for the remainder of your term.
"When we first started offering them they were
very popular," says Kim Moore of First Federal Savings Bank
in Frankfort, Ky. "Rates were high and they showed promise."
First Federal currently offers the bump-up option
only on two-year CDs. The bank pays about a half-percent less on
bump-up CDs than it pays on a slightly longer-term version -- a
30-month, traditional CD, without the bump-up option.
By purchasing a bump-up CD you're taking a gamble
that rates will rise. There's always the chance they won't, especially
if the feature is available on shorter-term CDs. (Each week, Bankrate
surveys a panel of experts to see whether they think rates will
rise. To see the latest Rate Trend Index, click
here.)
If a bank offers a two-year CD with the bump-up option
and a similar term CD without the option but a quarter point higher
interest rate, you would want interest rates to rise significantly
more than a quarter point during the two-year term if you were to
take advantage of the bump-up CD.
The longer it takes interest rates to rise, the higher
they'll have to go to make up for the earlier, lower-rate portion
of the term. So, be sure you have realistic expectations about the
interest rate environment before buying a bump-up CD.
Also, know how many times you're allowed to bump up
the rate. Some banks permit just one bump; others allow two. In
a rapidly rising interest rate environment you might have to do
a bit of math to pick the best time to bump.
Most banks allow customers to bump up without extending
the term of the CD, but some institutions may require the term to
be extended.