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Rate-Lock Options: Thinking Outside The Box

Bozo
  |     |   1,375 posts since 2011

The recent pulling of Patelco's 2.75% 5-year CD rate got me to thinking. What if I had been able to "lock" the rate by purchasing an option. For example, a "hot deal" appears on DA, but you don't have a CD maturing quite now, but do have a CD coming due in six months or so. The financial institution, in its wisdom, appreciates that. It also appreciates that many folks might be in the same boat. So, in a stroke of marketing genius, it offers "rate-lock options". For a fee, a prospective CD investor can purchase a rate-lock on a sliding scale, so much for a three-month rate lock, so much for a six-month rate lock, etc. The option, purchased at the time of the rate-lock, would give the prospective CD investor the opportunity to purchase the CD at the rate locked. If the investor chose not to exercise the option, the fee would be surrendered to the institution.

For the prospective CD investor, the issue would be a fairly simple math problem. Would the EWP on an existing CD exceed the cost of the option, after-tax (EWPs being above-the-line adjustments). Plainly stated, should I keep my existing CD to maturity and purchase the option, or cash in, pay the EWP, and buy the "hot deal" now.* I suspect financial institutions pay newly-minted PhDs to cogitate upon such scenarios. 

I know many financial institution marketing folks read this blog, so I'm tossing out this idea.

*Many would call this a "break strategy".

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cumulus
  |     |   1,266 posts since 2010
Even better than a rate lock option is an option some FI's already permit: namely allowing one to open a CD prior to funding it!

I've never requested this for a period of more than a few days, but have had some success. In particular when I finally was able to open my Patelco 5y 2.75% CD a couple of weeks ago I phoned to say I could assure them of having the funds at Patelco "tomorrow" (via an Ally next day transfer) and was there any way they could assure me that CD would be available "tomorrow". Short answer: no. Solution: they allowed me to open the CD that day, funded with a $0 deposit; even if the offer would have been withdrawn prior to my funds arriving at Patelco I was guaranteed the CD. And yes, the 5 year clock on my CD began on the date of funding (not the preceding day of CD opening).

Bottom line here: always ask/inquire, even if you're not optimistic about the results. (Thank you Patelco.)
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