Difference Between a Basic Certificate of Deposit & a Jumbo

Large CDs often earn better rates of interest.

Large CDs often earn better rates of interest.

Certificates of deposit come in many flavors. Plain vanilla CDs tie up your cash for a set period of time in return for a fixed interest rate. If you cash out early, you normally pay a penalty. Some special CDs, however, have variable interest rates, and some even allow you to take out money whenever you want. A jumbo CD is a special type for well-heeled investors.

Size

You can open some basic certificates of deposit with $500 or less. Although jumbo CDs normally require more cash, not all jumbo CDs are the same size. Banks typically require a minimum deposit of $100,000 for a jumbo CD, but some require a least $1 million and others require as little as $50,000. That's still a lot of money for most people. Yahoo Finance reports that institutions, rather than individuals, buy most jumbo CDs.

Interest Advantage

The main advantage of a jumbo CD is the chance for a higher interest rate compared to an ordinary certificate. Like basic CDs, your interest rate depends on how long you tie up your cash. For example, sometimes a five-year jumbo CD may pay two percentage points more than a one-year jumbo. However, if you tie up your money for a long time when rates are low, you could miss out on a better deal when they go up. Compare rates and terms for regular and jumbo CDs using the online tool at Bankrate.com.

Insurance

Federal deposit insurance protects your cash in any type of CD -- if you choose an insured institution -- but only within limits. A basic CD normally comes under the maximum of $250,000 for single accounts in one bank, but many jumbo CDs don't. If you have more than $250,000 total in one name at one institution, the excess isn't insured, even if it's interest. Use the online tools from the FDIC or the National Credit Union Administration to make sure your bank or credit union CD has coverage.

Secondary Market

Most ordinary CDs ding you with a penalty if you cash out early. Some jumbo CDs, but not all, give you a way to escape these penalties. These special jumbo CDs are negotiable, which means you can sell them to someone else on the secondary market. You can buy negotiable CDs through brokerage houses, which sometimes advertise penalty-free withdrawals. Often, however, there is a catch: If you have to sell after a fall in interest rates, you may get back less than you invested.

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