Saving Your Down Payment in a CD Account Could Make You Thousands (with a Catch) (2024)

FAQs

Saving Your Down Payment in a CD Account Could Make You Thousands (with a Catch)? ›

Certificates of deposit (CD) accounts, for example, could be a way to make thousands more on your initial investment, but there is a catch — you can't pull out the money before your interest term is up without facing a penalty.

Whenever you invest in a CD, you lock in the interest rate for the term. If inflation rises during the term, your APY won't be adjusted, so an interest rate that once seemed stellar might be lackluster after accounting for inflation.

But you know there's a catch. There's always a catch. If you cash out your CD before it matures, you'll face a penalty—and it could cost you months or even years of interest that's been building up in your account.

The top nationwide rate in each CD term—from 6 months to 5 years—currently ranges from 5.20% to 6.18% APY. With a $10,000 investment in a top-paying CD, you can earn hundreds to thousands of dollars of interest on your money—and much more than if you keep it in a typical savings account.

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.

The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.

A no-penalty CD has a fixed rate and term length like a standard CD, but lets you withdraw your money any time after the first few days without a fee. The catch is you have to withdraw the full amount as a general rule. Standard CDs, meanwhile, charge early withdrawal penalties.

This CD will earn $120.39 on $500 over five years, which means your deposit will grow by 24.6%.

What banks are offering 7% interest on CDs? Currently, no U.S. banks or credit unions are offering 7% APY on CDs. During August 2023, a few credit unions were offering 7% interest on CDs, but those were limited-time offers that are no longer available.

The interest is significant and predictable

Let's say you put $10,000 into a 5-year CD with the rate discussed above – 4.75%. After the 5-year term is up you'll have earned $2,611 in interest for a total account balance of $12,611.

How much does a $20,000 CD make in a year? ›

That said, here's how much you could expect to make by depositing $20,000 into a one-year CD now, broken down by four readily available interest rates (interest compounding annually): At 6.00%: $1,200 (for a total of $21,200 after one year) At 5.75%: $1,150 (for a total of $21,150 after one year)

How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.

Interest Rate Risk

CDs carry interest rate risk in that it's possible to lock in savings at one rate, only to see rates climb. Unless you have a step-up or bump-up CD, you wouldn't be able to take advantage of that higher rate without opening a new certificate of deposit.

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.

If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.

The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.

A CD may be the best option for some of your cash if you can afford to lose access to it for the duration of the term and if the CD's interest rate is competitive. CDs work best for specific, short-term savings goals, like down payments, vacations or weddings.

Market Crashes and CDs

Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.