51M. As a child I had a children’s saving account with compound interest. My $100 went up to just below $200 in around 4 – 5 years. That seems like peanuts, but to a kid that was a lot.As a young adult, in the mid 1990s, I remember my older colleagues were talking seriously about CD interest rates to put away for up to five years, at 6%.
Now, in 2024, with the major banks, a one-year CD from Bank of America is 0.03%. Maximum rates for 5 years is 2.5% at Chase, no matter how much money you put away. Savings accounts compound interest rates are 0.01%, max, IF you maintain at least $10,000 in the account.Yet interest rates for a housing loan are at 7% and putting housing purchases out of reach. How can the banks do this?
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In: Economics
Most people are telling you “look for competitive rates.” But they aren’t telling you *why* the rates are lower.
The bank isn’t giving you money to be generous. The money they pay you to borrow your money (because that’s what happens when you keep cash in a savings account or buy a CD), they only get by charging other customers interest on their loans. So if they have a mortgage that’s paying them 6% interest, they can afford to *borrow from you* at 4.75% on your savings account or CD. But if the Federal Reserve will loan them money at 0% (as they did for about a decade before the last year or so), then why should they pay you anything to borrow money? Because of this, high yield savings accounts and CDs paid nothing between ~2010 and 2022.
But now the Fed rate is at 5.5%. So home loans are at 7%, and you can get a CD or high yield rate at ~5% again. My Ally account went from .2% to 4.35% with me doing nothing. It tracks roughly with the Fed rate. I could get a better rate if I moved my money to some more competitive banks or credit unions, but that’s a hassle, so I don’t. And most people don’t. Because they don’t, you’ll still find plenty of savings accounts with shitty rates.
You also have to consider the long term outlook. Right now I can get a 12 month CD from Ally for 4.65% or a 5 year one for… *3.9%*?!? WTF is up with that?
Well, most people (and most economists) expect the Fed to start cutting their base rate later this year. If that happens then Ally doesn’t want to be stuck paying out 5% to borrow my money for 5 years when they could be borrowing from the Fed at 3% (or whatever). So, there are some weird distortions like that in the market as well.
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