Definition:
A Certificate of Deposit (CD) is a financial savings product issued by banks or credit unions that pays a fixed interest rate in exchange for depositing money for a specified length of time.

Example:
If Lisa has $10,000 that she doesn’t plan to use for at least one year, she could invest in a 12-month CD with a fixed 4% interest rate. At the end of the year, Lisa’s investment would mature, and she'd receive her original deposit plus the interest earned.

Explanation:
In real estate, CDs are considered conservative financial assets often used to demonstrate financial stability when applying for a mortgage. Mortgage lenders may count CDs as liquid reserves, improving borrowers’ eligibility and terms because it indicates responsible financial habits and available funds. CDs pay higher interest rates than typical savings accounts, rewarding depositors who commit their money for set periods (usually 6 months to 5 years). Early withdrawal usually results in penalties, making them less flexible but a reliable means to earn predictable returns.

Importance:
Understanding CDs matters for homebuyers because having them can significantly strengthen a mortgage application. CDs provide a stable financial cushion, making buyers more attractive to lenders, potentially securing better mortgage rates or loan terms. For sellers, buyers who demonstrate strong financial profiles with assets like CDs are appealing, increasing the likelihood of smooth transactions.

In short, Certificates of Deposit offer safe, predictable returns and financial stability, making them valuable tools when preparing to purchase or finance real estate.