Term Share Certificates: A Guide to Protecting Your Down Payment

You can use a term share certificate to safeguard a down payment on a house.

Term share certificates are the credit union equivalent of a bank certificate of deposit, or CD. Like CDs, these certificates require you to invest funds for a specific period of time, called the term. If you want to withdraw money sooner, you'll have to pay a penalty. In return for tying up your funds, these accounts typically pay higher interest than ordinary savings accounts. Most term share certificates work in similar fashion, but the details vary with the institution.

Investing Your Money

You must choose how long to tie up your money in a term share certificate. For example, certificates may be available in durations as short as three months or as long as five years. Longer terms usually carry a higher rate of interest, and institutions often pay higher rates on large amounts, such as $100,000 or more. Most term share certificates require a minimum investment, typically ranging from $500 to $1,000 or more.

Getting Your Money

At the end of the term you agreed on, called the maturity date, you can withdraw your money without penalty. Typically the institution allows a grace period of 7 days or more to make this decision. After that time, the certificate usually reinvests automatically for a similar term and is tied up again.

Advantages and Disadvantages

In a credit union belonging to the National Credit Union Administration, your investment receives federal insurance protection up to $250,000, similar to Federal Deposit Insurance Corporation coverage for banks. The main disadvantage of term accounts is that the penalty for early withdrawal may exceed the interest earned. Understand the terms and conditions before making your decision, even if you don't think you'll need the money before maturity.