As the Federal Reserve is expected to lower interest rates soon, banks are calling back CDs with higher interest rates, often to the investor’s surprise.
Known as “callable” CDs, these FDIC-insured certificates of deposit have a higher rate when they are issued, such as 5.5%, but can be called back by the bank when the rates decrease, MarketWatch reports. When a CD is called, the investor gets back what they paid, plus the interest earned up to that point. But they then face an investment risk when they decide what to do with it, especially if the prevailing rate is lower.
Although some financial experts generally advise against investing in callable CDs, many consumers just see the higher rates initially and don’t consider the reinvestment risk. Also, with historically low interest rates over the past few years, there hasn’t been a lot of consumer interest in CDs anyway.
But when interest rates started to rise, banks began to offer the best rates. For the most part, call options are on only brokered CDs and not the ones directly bought from a bank. Investors who are now facing how to reinvest money from a called CD should carefully look over their options and consider their goals when making that decision.
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