Dedicated to Deposits: Deals, Data, and Discussion

6.00% 36-Month CD at Penfed CU

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Pentagon Federal Credit Union just came out with some very high rates on their mid to long term CDs. Both the 3-year to 5-year CDs now have APYs of 6.00%. The previous APY of their 3 and 4 year CDs were 5.50% which was already near the top in the nation. The minimum deposit is $1K. The rates are effective through May 31, 2006. Below is the full list of CD rates and how they have changed:

CD Term Old APY New APY
6-month 4.00% 4.33%
1-year 4.30% 4.92%
2-year 4.75% 5.01%
3-year 5.50% 6.00%
4-year 5.50% 6.00%
5-year 5.67% 6.00%
7-year 5.88% 5.95%

Their short term certificate of deposit rates continue to lag, however, they are getting more competitive. The 12-month APY increased from 4.30% to 4.92% which is a decent yield for a one year CD. But clearly, it's the mid and long term CD rates that sets Penfed apart from the others.

Penfed has a record of starting each year with some high rate CDs. This year, they started with a 6% 7-year CD, 5.75% 5-year CD and a 5.50% 3 and 4 year CD. The 5 and 7-year rates went down in March to 5.67% and 5.88%. So it seemed like the rates would go down again at the end of April. Perhaps, with the long-term Treasury and bond yields finally going up, Penfed had decided to remain aggressive with their rates.

Penfed is one of the few credit unions that anyone in the nation can join. All that is required to be eligible is joining the National Military Family Association which has a membership fee of $20.

Another nice thing about Penfed is that you know it's a credit union that you can trust. Not only is it NCUA insured, but it's also the third largest credit union in the nation. It currently has over $8 billion in assets and over 665,000 members. Bankrate.com gives Penfed 4 out of 5 stars (sound) for financial strength.

Is Three Years Too Long?

I brought this issue up in a April 12th post on a 6.01% 48-month CD that's being offered at USA Federal Credit Union. Indications are that long term rates may finally start moving up. By the end of this year, it may be easy to find 6% 1-year CDs. Eight months ago, Corus Bank's 1-year CD was at 4.42% APY. Now it's at 5.30% APY.

One important factor before investing in a long-term CD is the early withdrawal penalty. Penfed certificates with terms over 6 months and up to 5 years have a 180 day interest penalty for early withdrawals (if redeemed after 180 days). If interest rates rise very fast, sometimes it's better to break the CD, take the penalty and invest in the new higher rate CD. Refer to this tool to help you in this decision.

One approach to help you decide on a long-term CD is to use a method I described in this post. In this method, you take the current rate on a savings account or short-term CD and try to estimate the rate that you might get when the long term CD would mature. Take the average of these two rates and compare it to the rate of the long term CD.

An example of the above method is to assume you're going to stick with 1-year CDs at Corus Bank rather than the 3-year 6% CD at Penfed. Now try to assume what a 1-year CD will be at Corus Bank next year and the following year. Let's assume 6% and 6.70%. The 3-year average at Corus Bank would be 6%. So there's no gain in going with a 3-year 6% CD. However, if interest rates start to fall next year, locking in with Penfed may be better.

Thanks to commenter who mentioned these new Penfed rates in the finding deals post!


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