You may already know that bank rates on so-called jumbo accounts, or deposits of $100,000 or more, are generally higher than ordinary bank rates. What you may not know is that, in the current rate environment, this benefit is especially strong when it comes to money market accounts.
Knowing this may help you decide whether to consolidate your bank accounts--and which type of account (savings accounts, money market accounts, or CDs) to choose.
Jumbo Deposit Bank Rates
According to figures from the Federal Deposit Insurance Corporation (FDIC), as of late April 2010, savings account rates for ordinary deposits averaged 0.20%. Interest rates on CDs with a 1-month term and a less-than-jumbo balance also averaged 0.20%, while money market rates and 3-month CD rates were a little better, at 0.31% and 0.34%, respectively.
For savings accounts, there was typically no benefit to opening a jumbo account, as the average savings account rate on jumbo accounts was the same as for ordinary deposits, at 0.20%. There were modest benefits for 1-month and 3-month jumbo CDs: jumbo rates on 1-month CDs were 0.02% higher than for ordinary 1-month CDs, and jumbo rates on 3-month CDs were 0.01% higher than for ordinary 3-month CDs.
For money market accounts, the benefit of a jumbo deposit was a little more eye-catching. Jumbo money market rates averaged 0.16% better than ordinary money market rates. That might still seem like a small number, but with ordinary rates averaging 0.31%, adding another 0.16% gets you better than 1.5 times the ordinary, non-jumbo money market rate.
Choosing Products Based on Jumbo Bank Rates
If you were about to open a savings account or CD at one bank and had some additional assets on deposit at another bank, you might well conclude that it wasn't worth consolidating those assets to qualify for a jumbo account rate. But if you are looking at money market accounts, you might find the reward of a jumbo account rate worth consolidating accounts.
Moreover, if you were in the market for a jumbo account in the first place, you'd probably go for the money market account rather than a CD. On average, with an ordinary-size deposit, you can pick up an extra 0.03% by choosing a 3-month CD over a money market account. But with a jumbo deposit, money market rates average 0.12% more than 3-month CD rates. Money market accounts are more attractive than CDs for jumbo investors right now, especially considering that CDs require you to commit your deposits for the term or risk early withdrawal penalties.
Of course, different banks will have different offers and different premiums for jumbo accounts over regular accounts. The point is that if you have the potential of opening a jumbo account, make sure you know the difference between jumbo rates and ordinary rates before making your choice of bank and deposit account type.
Jumbo Deposits and FDIC Insurance
With FDIC insurance limits scheduled to revert back to $100,000 on January 1, 2014 (from their temporary limit of $250,000), money market accounts may have another advantage over CDs when it comes to jumbo deposits. The greater flexibility of a money market account, compared to being locked into a CD term, would allow you to take advantage of a jumbo account under the higher insurance limit right up until the end of 2013, then break deposits into smaller increments before the limit reverts back to $100,000.