How to Use a Real Estate Certificate of Deposit to Buy Property

Article Summary:

Certificates of deposit are a low-risk investment opportunity that can help you save up for a real estate purchase. You can use CD laddering to help stagger the maturity dates so that you have more access to your money when the right deal comes up. Be prepared with a plan to avoid penalties and maximize the return on your investment.

The best real estate deals require finesse. The next time you buy a property, you may be able to maximize your money and minimize your mortgage interest payments by using funds from certificates of deposit. They might not be as liquid or high-performing as, say, the stock market, but they can be a safer place to keep your money if you plan to use it in the short term for a real estate purchase.

CDs could be the perfect tool for you to make a big real estate deal. Keep reading to learn about how to use a certificate of deposit for your next property purchase.

What is a certificate of deposit?

A certificate of deposit (CD) is a federally insured savings account. Financial institutions sell them as low-risk investment options.

In exchange for a higher interest rate than a regular savings account, CDs require you to leave the money in the account for a set period until it matures. A CD’s maturity date is usually one month to five years from its opening date. If you choose to withdraw your money before a CD’s full maturation, you will be subject to fees.

Once the CD account matures, you can withdraw your money and interest or reinvest it. If you are interested in opening a CD account, check out SuperMoney’s list of the best CD accounts.

How to use a certificate of deposit to save for a real estate down payment or cash purchase

There are several methods for maximizing CD benefits to save up to purchase a property. As with any money-saving tactic, the highest returns are seen over longer periods. Try the following methods to maximize your CD money-saving for a real estate purchase.

CD laddering

Use a CD ladder to access your funds periodically over time and efficiently reinvest. Basically, you open multiple CDs and stagger them at various maturity dates. Setting up a CD ladder allows you to access your money more frequently than if you had just one maturity date.

If you have the time horizon to do so, you can reinvest money from younger CDs into longer-term CDs as they mature. This can help you get the highest possible returns.

If you want to save up to buy real estate, consider starting a CD ladder as soon as possible. When you’re ready to make a purchase, you may have the opportunity to extract funds from one of your shorter-term CDs.

Pro Tip

CDs can be — as practically any investment tool — used to flip real estate, too. A good flip has an ARV (after-repair value) higher than the original purchase price. You can use CDs to pay for the property purchase and repairs.

Auto-renewal

A CD holder can elect to automatically renew their term with the same interest rate. This is a less-aggressive option for those who want minimal interaction with their money after depositing it.

With auto-renewal, your interest will steadily grow, and you will continue making money off your money. You can even implement auto-renewal as a part of your laddering strategy.

Just make sure your account doesn’t auto-renew when you don’t want it to. If that happens, you’ll have to pay penalties or wait until the next term ends to withdraw money. Specify whether you want your CD to auto-renew or not.

Deposit in traditional CDs for maximum benefits

There are several types of specialty CDs with different savings advantages. When it comes to saving for a real estate purchase, experts advise going with a traditional certificate of deposit.

Why? Most CDs with special offers like penalty-free withdrawals come with lower interest rates. This can significantly extend your timeline of saving for a house. SuperMoney’s CD comparison tools can help you choose the best CD for your goals and financial situation.

How to use a certificate of deposit to buy real estate

The unique properties of CD savings accounts make them useful for buying real estate. You can either pledge a certificate of deposit to secure a mortgage or cash out a CD for a down payment or purchase. They’re a great way to stash and grow your savings until you’re ready to buy.

For the smoothest process, make sure you open a CD at a financial institution that offers both CDs and mortgage loans. Once you’re ready to buy, follow these steps to use your CD to fund your next real estate deal.

Meet with a loan officer

When you’re ready to buy real estate with a CD, the first step you should take is to make an appointment with a loan officer at your financial institution. A loan officer can calculate the value of your CD. Banks only use the principal value for mortgage loans.

Negotiate loan terms

Loan terms depend on your bank’s policies. However, there may be room for negotiation. If using your CD to secure a loan, try to land a loan for 90-96% of the value of your CD. Most banks will not loan 100% of the value.

As opposed to CDs, mortgage interest rates determine how much extra money you pay — not gain — monthly. Aim to secure the lowest interest rate possible for your mortgage. The lower your interest rate, the less money you’ll pay for your real estate in the long run.

Pro Tip

Typical mortgage loan interest rates range from 2-4% above your CD interest rate. Keep this in mind when considering loan terms.

Using your CD to lower your mortgage loan principal

If you are concerned with paying a lot of interest over time, pay for your real estate transaction with as much cash as possible. Wait for your CD term to mature, then use the funds to pay down your real estate loan principal.

The more you can pay upfront, the less you’ll have to pay in interest later on. When the house is under contract, make sure you have CD funds available and finalize the details with your loan officer.

Cashing out Vs. leveraging a real estate CD

You could cash out your CDs to pay the full cost of a property. But consider that leveraging mortgage debt can bring you greater returns on your investments. Free and clear ownership might sound appealing, especially if you have the cash, but mortgage debt can help you better invest your money elsewhere.

Pros and cons of certificates of deposit

A certificate of deposit is a combination between a savings and investing method. As with most personal finance decisions, opening a CD comes with some advantages and some disadvantages.

WEIGH THE RISKS AND BENEFITS

Make sure you understand all of the features of CDs before you use them to invest in real estate.

Pros
  • Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) certification
  • Fixed terms
  • Fixed interest rates
  • Renewal options
  • Higher interest rates than a standard savings account or money market account
  • Larger deposits and longer terms offer higher interest rates
  • Smaller financial institutions often offer higher interest rates
  • Opportunities for CD laddering
  • Less volatile than the stock market
  • Interest rates rise with extended maturity dates
Cons
  • Minimum deposit requirements
  • Term-length-dependent interest rates
  • Early withdrawal penalty
  • Limited liquidity
  • Inflation risk
  • Interest taxes
  • Lower returns than other investment methods

FAQ

What are CDs in real estate?

CD stands for certificate of deposit. They’re an effective way to set money aside to save for a real estate purchase. You can earn interest on your savings over time until the CD matures. Use CD funds to pay the cash principal on your mortgage loan and borrow money for the rest of the purchase cost.

How does a certificate of deposit work?

A certificate of deposit is a type of savings account. CD accounts can have various term lengths during which account holders cannot withdraw money without penalties.

Typically, the longer the term, the higher the interest rate. They are an effective method for saving for real estate purchases because your earned interest compounds your returns over time.

What are the 4 main types of certificates of deposit?

There are more than four types of certificates of deposit accounts. The following are some of the most common types of CDs:

  • Traditional. These have fixed terms ranging from one month to five years, fixed interest rates, and early withdrawal penalties.
  • Individual Retirement Account (IRA). For those who want to invest their retirement funds somewhere less volatile than the stock market.
  • Liquid. You can withdraw your money at any time without a penalty, but they usually have lower interest rates.
  • Jumbo. These have higher minimum deposit amounts (often $100,000 or more) and usually offer higher interest rates as well.
  • Step-up/bump-up. This type allows for automatic interest rate increases or a one-time rate increase during the term, but they often start with lower rates than traditional CDs.

What is a disadvantage of a certificate of deposit?

Certificates of deposit have to be planned carefully. If you need to access the funds before the CD matures, you will be subject to fees. This can be tricky as you often cannot perfectly time real estate purchases. CD laddering may help mitigate this disadvantage.

Can you use a CD for a down payment on a house?

Yes, you can use a certificate of deposit to pay for a down payment on a house.

What is the difference between HUD and CD?

HUD stands for the United States Department of Housing and Urban Development. While it is related to real estate, it has nothing else to do with a CD, which stands for certificate of deposit.

Key takeaways

  • A certificate of deposit is a savings account that grows at a set interest rate over a set period until it reaches its maturity date.
  • CDs are a low-risk tool to save for real estate purchases. To do so, open traditional CD accounts with the highest interest rates possible. Use CD laddering and auto-renewal to maximize your returns until you’re ready to make a real estate purchase.
  • A loan officer at your bank can help you move through the process of applying CD funds to a mortgage loan. Try to get a low mortgage interest rate.
  • Plan your CDs according to when you want to access the funds. CD laddering may help with that.
View Article Sources
  1. Certificates of Deposit – Financial Industry Regulatory Authority
  2. National Rates and Rate Caps – FDIC
  3. Certificate of Deposit – Pulgini & Norton, LLP
  4. What is a Certificate of Deposit? – SuperMoney
  5. What is Leverage in Real Estate? – SuperMoney