Certificates of deposit (CDs) have high enough rates right now that they’re an attractive investment option for some people. If, for example, you have been sending extra money to your mortgage lender to pay off your home faster, you may want to put the money into a CD instead. And if you’re thinking about making extra payments on your mortgage, you also may want to reconsider that plan and research CDs as an alternative.
Here are two important reasons why buying a CD could make a lot more sense for most people right now than paying extra on a home loan.
1. You may be able to get a better ROI from CDs with no added risk
If you make extra mortgage payments, the return on investment you get is the interest you save. If you took out your home mortgage between 2009 and March of 2022, chances are good you have an interest rate that’s under 5.00%.
Right now, there are many CDs offering rates above 5.00%. These are FDIC-insured CDs. So you aren’t taking any risk when you put your money into them, as long as you don’t need the money before the CD term ends. If your mortgage rate is below that 5.00% threshold, you can get a better risk-free return by opening a CD instead of making extra mortgage payments.
There is absolutely no reason not to pursue this better return. This isn’t like buying a stock share, where you take a chance of loss. The CD rate is guaranteed for the duration of the term and it’s just as much of a sure thing as early mortgage payoff.
2. A CD is a more liquid investment
A CD makes your money much more accessible than paying extra on a mortgage. You do have to leave your money locked up for the duration of the CD term to avoid penalties. But terms generally range from three months to five years, so you aren’t making a huge time commitment. And if you end up having to take the cash out, you can do it pretty easily (although you pay a penalty equal to a few months of interest — or longer, depending on the issuer and your CD’s term).
On the other hand, if you’ve paid extra on your mortgage, you’ve built equity in your house. You now have a greater ownership share since you owe the bank less. But you can’t really get that money out if you need it. You’d either have to sell your home or take out a home equity loan, which can be really expensive and time-consuming.
Say you have an emergency and need money. You could cash out your CD if you had to, and just pay the penalty. Or, depending on the CD term, you could wait a few months for it to mature. Either of these options is almost definitely going to be easier and cost you less than selling your house or pursuing a loan against the home.
Better returns, more liquidity, and no risk. It’s an easy call. Don’t pay extra on your home loan if it has a rate below 5.00% when you could open a CD instead.
Pick a CD with a great rate from this list of CDs with the highest rates today. Put your money into that CD instead of sending extra to your lender. Then enjoy the unprecedented chance to earn the recent record-high rates CDs have been offering. If CD rates drop in the future, you can always go back to making those extra mortgage payments.
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