“`html

Understanding Bump-Up and Step-Up CDs

A certificate of deposit (CD) offers higher interest rates than standard savings accounts, making them an attractive option as rates continue to climb. When you purchase a CD, you lock in a fixed interest rate and agree to keep your money in the CD until it matures. However, if you want to take advantage of rising interest rates without paying an early withdrawal penalty, bump-up and step-up CDs might be the solution.

What Is a Bump-Up CD?

A bump-up CD, also known as a trade-up CD, allows you to increase your CD’s interest rate during its term. Typically, you can request a rate increase once, aligning your new rate with the bank’s current offering on a similar CD. For instance, if you invest $5,000 in a two-year CD at a 3% interest rate and the bank later offers a two-year CD at 4%, you can request a “bump” to the 4% rate for the remainder of your term.

Pros and Cons of Bump-Up CDs

Benefits

• Increase your CD’s interest rate to match the bank’s current offering.
• More widely available than step-up CDs.
• Flexibility to choose when to request the rate increase.

Drawbacks

• Starting interest rates may be lower compared to fixed-rate CDs.
• Limited to one rate increase during the CD’s term.
• Requires monitoring the bank’s current CD offerings.

What Is a Step-Up CD?

A step-up CD features several interest rate increases based on a predetermined schedule. Unlike bump-up CDs, you don’t need to request these increases; they occur automatically. This type of CD can be beneficial if you anticipate declining interest rates in the future.

Pros and Cons of Step-Up CDs

Benefits

• Predictable returns with a known term and interest rate schedule.
• Steady interest rate increases applied to your entire balance.
• Beneficial if interest rates decline.

Drawbacks

• Very low starting interest rates.
• Composite rates may be less appealing compared to fixed-rate CDs.
• Not widely available.

How to Open a Bump-Up or Step-Up CD

Follow these steps to open a bump-up or step-up CD:

1. Compare rates and terms from different banks and credit unions.
2. Ensure you meet the eligibility requirements, including minimum balance and membership criteria for credit unions.
3. Complete the application process, which may be done online or at a branch.
4. Fund the CD through an online transfer or by bringing a check to a branch.

Alternatives to Bump-Up and Step-Up CDs

Consider these alternatives if you’re looking for more flexibility or higher returns:

• Fixed-rate CDs: Often start with higher rates than bump-up or step-up CDs.
• No-penalty CDs: Allow early withdrawal without penalties, offering flexibility to switch to higher-rate CDs.
• CD Ladder: Involves opening multiple CDs with varying maturities to take advantage of rising rates.
• High-yield savings or money market accounts: Offer high interest rates without locking up your money.

The Bottom Line

While you can’t predict future interest rates, you can choose savings and investment accounts that align with your financial goals. Bump-up and step-up CDs are worth considering if you’re concerned about fluctuating interest rates. For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you make informed financial decisions.

“`