Archive for the 'Banking' Category
I’ve already written about Millennium Bank - the offshore bank offering 8% certificates of deposit that are not FDIC-Insured, let alone highly regulated. More recently, a group called the Federally Insured Savings Network (FISN) has been advertising FDIC-insured Certificates of Deposit Paying Over 8%”. What’s the deal?
It definitely looks too good to be true, but let’s look at the fine print and see what we can find. I’ll just focus on the highlighted CDs paying a 8% and 8.25% APR to save some time.
These Are Long-Term Investments With Very Limited Liquidity
The maximum terms for these CDs are for 15 or 20 years! If you wish to withdraw early, you can be sure it will be with a fat penalty. However, it may not even be possible to re-sell them at all. From the disclosure: “Lack of Liquidity. The CDs will not be listed on an organized securities exchange. JPMSI may offer to purchase the CDs upon terms and conditions acceptable to it, but is not required to do so.” This could be worse than even taking money out of your IRA or 401(k).
High Minimum Investments
In this case, you need $25,000 to invest with FISN as your broker to JPMorgan Chase Bank.
They Are Callable, And That’s Not Good
A callable CD means that the bank can say “I found a better deal elsewhere, so I no longer want to pay you this much interest anymore. Bye!” You’ll get your principal plus interest earned up to that point, but this usually happens when interest rates fall, leaving you stuck with alternative paying a lot less than you were getting before.
On the other hand, you the depositor have no such flexibility. You’re still stuck for as long as the bank wishes. Again - up to 20 years! Put another way: Heads, the bank wins; Tails, you lose.
Not A Fixed Rate CD - 8% Rate Isn’t Guaranteed
When talking about a bank CD, you’re usually referring to a fixed rate CD. However with this investment, you may or may not get paid any interest based on the following criteria:
Interest is paid quarterly for every day the 30Yr Constant Maturity Swap (CMS) Rate is greater than the 10Yr Constant Maturity Swap Rate (Positive Yield Curve). If the 10Yr CMS Rate is greater than the 30Yr CMS Rate on any day (Negative Yield Curve) no interest is accrued for that day. Full 8.00% rate guaranteed for first year.
Trying to figure out exactly what CMS rates were made my head hurt. But very generally, if the long-term interest rates are higher than short-term interest rates (positive yield curve) you’ll get paid your fraction of 8% annual interest that day. However, if the curve goes negative, which it has for extended periods in the last few years, you don’t get paid any interest that day. So 8% is basically a best-case scenario. Over a 15-year period, I highly doubt you’ll be getting the full 8% each year. Earning 0% is the worst-case scenario.
I’m Not Interested
So yes, technically these are FDIC-insured to the extent that your principal is safe. But your money could be stuck sitting around earning nothing while inflation eats away at the actual value. And the bank will only keep paying the interest if it remains profitable for them. These seem to be sophisticated investments being marketed at the unsophisticated public. Buyer beware!
Posted in Banking, Investing | 8 Comments »
As expected after the 0.75% Fed rate cut, the interest rates on savings accounts aren’t doing so hot. From the classic ING Direct dropping to 3.65% APY (still $25 bonus), to the formerly high-flying FNBO Direct landing at 4.30% APY.
My old 6.01% promo rate at Everbank was nice for 3 months, but is now gone as well. I’m happy that my core account at Washington Mutual is holding steady at 4.75% APY, at least for now (read my review). It’s hard to go back to lower rates, but still remember when 3% was an awesome deal.
Other options?
If you’re looking to lock in a higher rate and willing to trade some flexibility, IndyMacBank has 7-month CD at 5.0% APY. If you’re looking to gamble and willing to jump through some hoops like mandatory debit card transactions, the First Arkansas Bank has a checking account paying 6.06% APY. Be aware, though, as it’s very unlikely his rate will last much longer. Try my Rate Chase Calculator to see how much you’ll make if the rate difference is the same for a month (even that might be optimistic), and keep in mind the potential lost days of interest.
Posted in Banking | 47 Comments »
In the past week or so, several online banks have responded to the Fed rate cuts with drops of their own, including:
Chasing Higher Yields?
- Countrywide Bank has a Savingslink savings account that pays 5.30% APY for balances over $10,000 (4.0% for under $10,000). They also have a 3-month CD paying 5.50% APY.
- Everbank has a promotional 5.51% APY for 3 months on their FreeNet checking account.
- Use my Rate Chaser Calculator to estimate how much more money you’ll make.
My personal bank setup remains the same
I still use my Washington Mutual Free Checking / 4.75% APY Savings combo as my core account, and I’m happy the rate has not dropped since going staying at 5% for a long time. Read my WaMu review for details. I then supplement this with the occasional rate-chasing when it is worth it for my large cash balances. Currently, I am still getting 6.01% APY from the older Everbank 3-month promotional rate. It’s about to end, so I’ll have to start keeping track of these things more closely again.
Posted in Banking, Deals & Offers | 47 Comments »
It had to happen eventually… WaMu appears to have lowered the interest rate on their online savings account from 5.0% to 4.75% APY:
This brings them back in line with other online savings accounts, but I still enjoy having a local bank as the core of my bank account setup and being able to do things like deposit my paper checks directly into my savings account (to a real human!). More details about the actual perks in my review of this WaMu Checking/Savings combo.
My cash savings are now earning less, but mortgage rates are still rising. Bah humbug!
Posted in Banking | 42 Comments »
Wells Fargo Bank is offering a $50 bonus for opening a checking account with them. Note that they do perform a hard credit check. Their checking account rules vary by state, but I think most have one that is free with direct deposit. You can simply simulate a direct deposit with an online bank transfer via ING Direct or similar. Via commenter Paul.
Limit one $50 bonus per household. To qualify for your $50 bonus, you must open and fund a new personal Wells Fargo checking account with a minimum initial deposit of $100 (not including the $50 bonus) by November 30, 2007. The $50 bonus is available with all Wells Fargo checking accounts, including non interest-earning checking accounts, except for Wells Fargo College Checking?, Wells Fargo Teen CheckingSM and Wells Fargo Opportunity Checking? accounts. The $50 bonus will be deposited to your new Wells Fargo checking account within 30 to 45 days of opening.
I thought I’d also throw out there that IndyMac Bank is offering a 4-month CD paying 5.65% APY. $5,000 minimum, online-only.
Posted in Banking, Deals & Offers | 22 Comments »
LaSalle Bank (now owned by Bank of America) is offering a $100 bonus for opening a checking account, savings account, and using the debit card once. Likes like you need $250 for the checking and $100 for the savings. Keep the minimum amount in there ($250 for checking, none for savings*), and that’s a very nice rate of return.
In addition, you can even fund with a credit card (up to $1,000 per account) and have it count as a purchase. Great for those with rewards credit cards.
Read the rest of this entry…
Posted in Banking, Deals & Offers | 26 Comments »
Yesterday’s big news was the Fed Funds Rate drop by 0.25%, which I celebrated by taking my nephews and nieces trick-or-treating and then stealing some of their candy. (I love BottleCaps! 
)
Anyhow, just like last time, this may cause another round of drops in high-yield savings accounts and money market fund accounts.
An early example is ING Direct, which has already lowered their Orange Savings rate to 4.2% APY (no minimums), and their Electric Checking rate tiers to 3.25% APY (for up to $50,000). You can still get a $25 bonus for signing up the savings account with $250, though.
Countrywide Bank has 6-month and 12-month certificates of deposits offering 5.65% APY ($10,000 minimum), if you are looking to lock-in for a while at a decent rate. Of course, I wouldn’t exceed the FDIC limits if you use Countrywide to be safe. Use different ownership titles to get more coverage.
I predict some weird market turmoil in the next couple of weeks (although I’m not taking any bets on my own accuracy).
Posted in Banking | 16 Comments »
Back in April I shared my personal bank account setup which I felt offered the best balance of convenience, liquidity, and interest paid out for my geographic location and tax situation:
Basically, I used my Washington Mutual Free Checking / 5% APY Savings (see review) account combo as my core account, but kept most of my money in T-Bills for the higher yield and state income tax exemption. Since then, a couple of things have changed…
First, the rates on 28-day Treasury Bills started to drop significantly, making their tax-equivalent return unattractive. They remain so today, as even the 6-month T-Bill rates are unexciting. In May, FNBO Direct (review) came on the scene and offered 6% APY until 9/28. So as my T-Bills matured I gradually moved them into FNBO.
Then 3 weeks ago, the Fed Funds rate was cut for the first time in years, which caused many banks to adjust the interest rates paid out on high-yield savings accounts. FNBO dropped their rate to 5.05% APY, barely above the 5% of Washington Mutual. I have been waiting for the dust to finally settle since, and I think it has since the speculation is now about what will happen during the next Fed meeting at the end of October.
Through all this, the WaMu (online-only) savings account has stayed constant at 5% APY. I’m surprised! I must say though, I’ve been enjoying this sort of “Core and Explore” setup for bank accounts. Most of my day-to-day activities like online billpay, checkwriting, deposits, ATM withdrawals, even getting money orders - they can stay stable and familiar with WaMu. I can also keep a nice chunk of money within quick reach, but still earning 5%. Then I get to rate-chase online with the rest of my temporary $100,000 cash hoard. So I think I’ll keep this way as long as I can:
So what is the Bank du Jour? Well I just mailed in my check and signature form for Everbank’s FreeNet checking account last week, but it hasn’t been cashed yet. I like that the 6.01% APY is guaranteed for 3 months, and my Rate Chaser Calculator says the move should clear me at least another $100 over those few months. It may not be as lucrative for smaller balances, but to each their own.
Posted in Banking | 52 Comments »
It was announced today that one of the first online-only banks, NetBank, has officially failed and control has been taken over by the FDIC.
A worried reader just asked me about NetBank earlier this week, and I had pointed him to my post FDIC Insurance: What If My Bank Fails? Make Sure Your Money Is Covered, where I said:
- Banks still fail, and without warning.
- If your money is insured, it is unlikely any failure will interrupt access to your funds for long. Either another bank will take over (they all want more deposits), or the FDIC will pay out from their reserves.
- Never exceed FDIC insurance limits, because you may never see your uninsured money again.
I’m happy to say that I gave out correct information, otherwise I’d feel really bad. NetBank did fail without any prior notice to customers, although a diligent person would have known they were in trouble. Things haven’t been good at NetBank for a while, especially after a previously-announced takeover by Everbank recently fell through. They’ve been unprofitable since 2005, losing over $300 million dollars in the past two years.
Appropriately, online-only ING Direct is taking over the insured consumer deposits. Indeed, there will be very little interruption:
You will still be able to access your money the same way you have in the past, using your ATM card or Visa? check card, checks, online bill pay, wire transfers and standard deposits. Any automated features, such as bill payments or direct deposit, will continue as scheduled. Please Note: As of 5:00 PM EST Sunday, September 30, you will be able to resume all normal account activities via the NetBank website.
NetBank CDs will even stay locked in at their current rates! I just feel sorry for the people who exceeded their FDIC limits. $109 million in uninsured deposits! Why would you do that?! Laziness? Now those people can only expect half their money back 
Due to the projected sale of assets of the former bank, the FDIC is in the position to provide each uninsured depositor with an dividend equal to 50% of your uninsured amount.
Posted in Banking | 31 Comments »
Lots of e-mails coming in from banks today…
HSBC Direct drops from 5.05% to 4.50% APY. Yeesh… not a good sign for online savings accounts in general!
FNBO Direct announces that the new rate after 9/28 is 5.05% APY. Ho-hum, about what I expected. They did also announce a 2% cash back credit card, but only for 12 months. Bye, FNBO, it was fun while it lasted. Currently, I am moving back to my local Washington Mutual checking/saving account. I’m undecided where to go next if I’m going to rate-chase.
Maybe one of these previously-discussed options, maybe Bank of Toledo, but that 10 debit card transaction requirement is a pain and I’m skeptical about how long the 6.01% will last.
ING Direct is still at 4.30% APY but is offering a $50 sign-up bonus, higher than the usual $25. Via reader Scott.
Pentagon Federal Credit Union is now offering 3, 4, and 5-year CDs at 6.0% APY. If you’re looking to lock up rates for this long (I’m not), these rates look pretty good. Early withdrawal penalty is 6-months of interest. Membership required, you can join the NMFA for $20 if you don’t qualify otherwise.
(Update) Emigrant Direct is now at 4.75% APY, down from 5.05%. Could have been worse, eh?
Posted in Banking | 84 Comments »
With all this talk about the Fed Funds rate drop, a lot of people are wondering what it means for consumer rates like savings accounts, credit card APRs, and mortgage rates. Here, I wanted to explore the savings account relationship. First, some quick definitions:
What is the Fed Funds Rate?
With our current system of fractional-reserve banking, US banks only have to keep a certain amount of money reserved at all times - Currently, it’s only 10% of checking account deposits and nothing (!) on time deposits like savings accounts. Banks usually try to keep as close to this minimum as possible, so that they can lend out the rest at higher interest rates and make that juicy profit.
In order to stay as close as possible, banks often lend money to each other overnight as needed. One bank may have extra in reserves, while another may temporarily not have enough, and this way it’s win-win. The target interest rate for this is the Fed Funds Rate (FFR).
What is the Fed Discount Rate?
This is the exact interest rate at which banks can directly borrow from the Federal Reserve. This is usually a last resort, as such loans are an indication of financial weakness and subject to audit.
What is the relationship between the Fed Funds Rate and interest rates on high-yield savings accounts?
This is just my own speculation, but I would imagine that banks would not want to offer significantly more than the Fed Funds rate. Why would you pay 6% interest out to individuals when you could just pay 5% to another bank? Still, I doubt that banks can borrow an unlimited amount of money via other other banks, so they may be willing to pay a bit more than the FFR if they have the ability to make a profit. Finally, they may just be operating at a temporary loss in order to grab some deposits that hopefully will stay later from branding or just convenience (*cough* FNBO Direct *cough*).
Here is a historical chart of the Fed Funds Rate versus the APY paid by online banks ING Direct and Emigrant Direct. I chose these two because they have (1) been around longer than others, and (2) are online and as such should be operating with the thinnest margins. The data points for ING should be close, but not perfectly accurate, as I used Archive.org at 2-month intervals for rate info not available in my own archives.
You can definitely see some correlation, but it’s not perfect. It looks like ING was more aggressive in 2002-2004, and then gradually become satisfied with fatter margins. Emigrant seems to be following the curve closely, which would indicate an interest rate drop soon. So if you want to predict the interest rate of your own bank, not only do you want to look at the FFR, but also the bank’s historical margins and whether they are looking to gain (or simply defend) market-share.
A little birdie told me to expect an FNBO Direct rate definitely under 5% after 9/28. I’m just writing this here to see if it turns out to be correct.
Posted in Banking | 23 Comments »
I’m sure you’ve heard by now, Bernanke and Friends cut the Fed Funds rate by 50 basis points to 4.75%. It was the first rate reduction in 4 years, which then spawned the biggest one-day gain in the Dow in about the same time. It seems like everyone has an opinion on the Fed rate cut. Some said it was needed to curb the hysteria and possible recession, while others thought it was just a bail-out for people who took unreasonable risks and now don’t have to pay the price. Personally, I think it’s just trying to delay the inevitable, but I’m no economist. I always try to keep a long-term view on the stock market, so I’m not that concerned there. So how else will this affect things?
Savings Account Rate Drops?
ING Direct has already dropped their savings rate from 4.50% to 4.30% APY as of today (plus their checking tiers as well), and I expect some other high-yield savings accounts to follow. I think one hope we have is that banks may want to stay at 5.0% for psychological reasons. If you want to lock in some 6-month or 1-year certificates of deposit, I wouldn’t wait too long to do so. Anybody notice any other drops?
Mortgage Rate Drops?
Personally, I’m hoping that this rate drop doesn’t work, and the the housing market continues to weaken. That way, I can still get a low mortgage rate with our excellent credit, and a house at more reasonable prices! But I wonder if significantly lower mortgage rates will actually occur…
Posted in Banking, Real Estate | 50 Comments »
Bank of America now has their own high-yield savings account, though with a minimum balance. You won’t find it advertised though, it’s tucked away in their new MyExpressions banking section. If you click around the various organizations, you’ll see a variety of checking/savings combos with different interest rates. The two highest I found were the Humane Society and the Defenders of Wildlife. Here are the current rates for those two groups as of 9/17 for Oregon:
You need $1,000 to open, and a minimum daily balance of $2,500 to avoid a $12 monthly maintenance fee. If you already bank with BofA and can always keep $2,500 in savings, this looks like a great way to boost your interest rate from the usual piddly 0.20%. Be sure to look at the ‘Money Market Savings’ account, not the ‘Regular Savings’ account. Can’t find it? It took me a while too, so I went ahead and made a video showing how to locate the account online.
If you are already have a BofA account you can login at the bottom and have the application pre-filled for you. New customers will experience a hard credit pull. Per a phone call, you don’t need to be a member of the actual association to apply for the account. I just hope these high rates don’t disappear once everyone finds out about them! (Though I’m not helping…) Thanks goes to Trice and BankDeals.
Update on 9/21: The rates have dropped to a range of 4.65% for $2,500+ to 5.01% APY for $50,000+.
Posted in Banking | 41 Comments »
Many people who are with FNBO Direct right now earning 6.0% APY are asking - What is FNBO Direct’s rate going to be after September 28th? After a few phone calls, the official answer is apparently “We’re not going to tell you until we have to… on 9/28.”
This is actually pretty smart on their part. If they announced that the rate is going to drop now, then people may already start moving their money out. It’s better to keep us in suspense, playing off our hope that it will somehow stay high. I personally feel like it’s going to go back to 5.25% at the highest, otherwise they would have told us to kept us from preemptively moving. But that’s just my guess.
If this turns out to be the case, then the rates for no-minimum balance, no-monthly fee, liquid savings accounts will be again clustered closely around (a respectable) 5% APY. For those that want to keep chasing, I also tried to find the best combination of highest rate, FDIC-insured, lower minimums, and high liquidity:
6.01% APY for up to 6 months from EverBank, $1,500 minimum
Although this is technically a promotional rate for their FreeNet Checking Account, since it’s guaranteed you could simply treat it like a 3-month, 100% liquid CD paying 6.01% APY. Here are the details:
- 6.01% APY guarantee for first 3 months, after it goes to 3.35-4.89% APY based on balance.
- $1,500 minimum to open, no monthly minimum or fees, no direct deposit requirement
- Online Billpay costs $4.95/month if you have less than $1,500 in there, $25 fee if closed within 30 days of opening
- Free ACH in/out funds transfer system
- Checkwriting (1st 50 free), ATM rebates (up to $6/month), Postage-paid deposit envelopes
- FDIC-insured (certificate #34775), 3 star “Performing” Safe & Sound rating
After the first 3 months (assuming it’s still available), you can then open a Yield Pledge Money Market that also has 6.01% APY for 3 months. Also $1,500 minimum to open. It has more restrictions since it’s a savings account as well as a monthly minimum balance, so go with the Checking first. In total, this offers up to 6 months more of 6% goodness.
5.70-5.75% APY from IndyMac Bank
Indymac Bank has seen some troubles from the subprime loan mess, even though it specialized more in “Alt-A” loans, which are between prime and sub-prime in quality. However, it does offer some of the current top FDIC-insured rates. Here are two options:
$5,000 Mininum - Internet CD
- 5.70% APY for 5-month or 6-month Certificate of Deposit.
- Minimum to open is $5,000.
- It’s important to note that these are certificates of deposit, and so you can’t transfer money in and out as with checking/savings accounts. In addition, there is a early withdrawal penalty of 1 month of interest.
$25,000 Mininum - Internet First Rate Money Market
- 5.75% APY for balances above $25,000. No guaranteed term for this rate.
- Minimum to open is $1,000. Monthly fee of $7 if your balance falls below $1,000.
- Limited checkwriting is available.
Indymac’s FDIC certificate number is 29730, and it has a 2 star “Below peer group” Safe & Sound rating. Worried about their financial health? Check out my post exploring What happens if my bank goes bankrupt or fails? There may be ways to expand your $100,000 FDIC coverage.
Posted in Banking | 38 Comments »
For a while now, online payment service PayPal.com has offered an extra reason to keep money in their accounts - a money market fund paying around 5% interest annually. I get asked about it regularly, and here I will explain in detail why I do not recommend keeping any significant amount of money in this account.
Now, when you think about a money market account, what are the top three things you look for? Here are mine, from most important down to least important:
- Safety. This is cash savings, so the top priority is that you don’t want any risk or chance of loss.
- Liquidity. This is not a certificate of deposit; You want to be able to access the money at any time.
- Yield. You want to earn a competitive rate of interest.
I’ll address them in reverse order:
Yield
Its 7-day average yield as of 8/16/07 was 5.04%. This isn’t bad, and historically the fund has offered competitive rates, although they are not necessarily the highest. In looking at the prospectus [pdf], these higher yields appear to be the result of temporary fee waivers. Without the ongoing fee waivers, the yield would be about 0.70% lower. Whether or not they will keep the yield competitive with these waivers in the future is unknown.
Safety Concerns
As with all money market mutual funds, they are not FDIC insured. PayPal is not a bank. However, the money market fund is still subject to the same restrictions as any other retail money market fund, and must invest in the highest rated securities out there. In addition, PayPal is a subsidiary of eBay, and the fund is run by Barclays Global Investors, a big name that manages trillions of dollars of assets. A retail money market mutual fund has never gone below the standard $1 per share for an individual investor, and I don’t expect it to here.
However, there is also the different safety concern of what happens if someone fraudulently gains access to your account. If someone hijacks your bank account, what can they really do? They can’t just go out and buy something. In order to set up an online transfer, they still need to provide account and routing numbers to a bank account with the same name on the account. Even if you do lose money, you are protected by Federal Reserve Board?s Regulation E and have your personal liability capped.
On the other hand, PayPal is inherently risky because it allows the instant ability to spend your money! In fact, they can send money to anyone with an e-mail address. If someone steals your password, they can start sending money right away to various vendors and other users. Such fraud can be very hard to track. And then who decides if you get your money back? PayPal.
There are countless complaints of people who’ve been on the bad end of a PayPal dispute. I’d be very careful. Worst case - you lose money!
Liquidity
Again, here PayPal gets to write it’s own rules. It is not a bank, and is not subject to the many regulations that a bank has to follow. They can freeze your account at any time. PayPal froze my account once for no good reason. (Unless you count a complaint of one nervous buyer who mistyped his tracking number and thought I was scamming him.) This can lead to weeks if not months of faxing them different documents in order to prove you’re you, or you didn’t scam someone else, or whatever. Meanwhile, you can’t withdraw any of your money, and they may even take some of it away from you.
The point here is that you are not guaranteed access to your money. Again, PayPal is sole judge and jury.
Conclusions
The PayPal Money Market Fund account, while offering a decent interest rate and a little bit of added convenience, fails to satisfy the two most critical requirements of a cash savings vehicle - to maintain the highest levels of both safety and liquidity. Sure, if you use PayPal a lot, you might sign up for it to earn a bit of interest on your in-transit money, but I wouldn’t keep large sums of money in such an account.
There are so many other FDIC-insured, highly-regulated banks that offer similar levels of interest and easy online access, why would you want to?
Posted in Banking, Insurance | 19 Comments »
