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
Comes down to cost of funds. Banks don’t make 7% on a mortgage. They have to borrow cash from other banks and use deposits to lend money.
The cost of funds dictates the cost of rates. You will see cd specials when banks are looking to drum up funding. If it costs them 5% to get money from their bank, you may see a cd special at 4% to increase the yield.
There are plenty of places offering pretty decent returns on savings and cds but banks are smart. They’re not going to guarantee funds for 5 years at 6% when that could very well turn into a loss when rates come down.
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