What are Mediated CDs?

If you want to boost your savings while keeping your financial portfolio safe, a CD through brokers may be an option worth considering.

A brokered CD is a type of CD that you can buy through a broker or brokerage firm rather than through a bank. With a brokered CD, you can take advantage of most of the benefits of a traditional CD, plus take advantage of longer maturities and higher interest income. At the same time, it is not a perfect option for everyone. You should be aware of potential pitfalls before buying a CD offered by brokers.

Below, CNBC Select explains how a brokered CD works, its pros and cons, and whether you should consider investing in one.

For example, at the time of writing Fidelity offers 4.6% APY on brokered CDs for maturities between nine and 18 months. Karl Schwab advertises an even higher yield of 4.7% APY for maturities between 10 and 18 months. To compare, First National Bank of America CDCNBC Select’s pick for best one-year CD earns 4.4% APY at the time of writing.

To buy a brokered CD, you need a brokerage account. Furthermore, a broker sets a minimum investment amount, usually $1,000, and minimum increments for adding funds. When you buy a new CD, or a CD that is on sale for the first time, there are usually no upfront costs. If you buy on the secondary market, meaning you buy from people who sell their brokered CDs, your broker may charge you.

You can buy CDs from different banks and keep them in one brokerage account. This can be useful if you have a large amount to invest and want to manage all your CDs in one place. FDIC limits federal insurance to $250,000 per customer at an insured bank. Since your brokerage account can hold CDs from multiple banks, you can protect amounts that exceed a single bank’s FDIC limit.

When buying a mediated CD, make sure that it is available on demand. Banks often offer higher yields on these CDs, but there is a caveat. If you buy a callable brokered CD, the bank can terminate it before the maturity date. This can happen, for example, if interest rates fall. In this case, you will get back your first deposit, as well as the interest you earned, but you will not get the full return you expected.

After buying a brokered CD, you can leave it alone until expiration or choose to sell it. Be aware that this can be risky as a CD can lose some of its value, especially in an environment of rising prices. When interest rates on new CDs rise, you may experience less demand for CDs that you purchased at a lower APY. In addition, you will probably pay a selling fee for trading your CD.

cons

• Brokered CDs carry certain risks. For example, when interest rates rise, you could lose money on a brokered CD if you sell it before maturity. However, brokered CDs are still safe in the sense that they are protected by a bank’s FDIC insurance policy.
• The issuing bank can name a brokered CD. This can cause you to miss out on potential future earnings.
• Interest on brokered CDs is not aggravated. If you want to earn money from your interest, you must reinvest it in another account.

While not an ideal choice for everyone, mediated CDs can be very useful in certain cases.

This is especially true if you want to invest in a CD but deposit more than $250,000. In this situation, you can buy multiple CDs through a single brokerage account and have all of the funds covered by federal insurance.

A brokered CD can also be a good choice if you are looking for more flexibility than a traditional CD can provide. For example, if you want more term options or don’t want to worry about penalties in case you need to withdraw the money early, a brokerage CD might be a good choice.

On the other hand, if you want something simpler and more predictable, you might want to stick with a traditional CD. Brokered CDs can seem more complicated and some of the terminology may be new to you if you are new to trading investments. In addition, there is a risk of losing potential value depending on when you sell or when the bank decides to call the CD.

Opening a brokered CD can be a good idea if you’re saving for a big purchase and want to take advantage of longer maturities. While they offer more liquidity than traditional CDs, for the easiest access to your money, such as when you’re saving for your emergency fund, you’ll want to use a high-yield savings account instead.

A brokered CD is similar to a traditional CD but can offer higher rates, longer maturities and more liquidity. You can buy this type of CD through a broker and possibly resell it before maturity on the secondary market. It is a relatively safe investment vehicle, but be sure to consider other types of CDs and CDs high-interest savings accounts and compare rates and terms to determine what works best for you.