What U.S. savings bonds are and why homeowners buy them

A U.S. savings bond is a debt security issued by the U.S. Treasury that you buy at a discount and hold until maturity, when the government pays you back the full face value plus interest. You are essentially lending money to the federal government, and they pay you interest for the loan. Homeowners often use savings bonds as a conservative way to set aside money for future home repairs, property tax payments, or other long-term expenses because the principal is may provide by the U.S. government and cannot lose value.

The two types available to individual buyers are Series EE bonds and Series I bonds. Series EE bonds earn a fixed interest rate set when you buy them and held for the life of the bond. Series I bonds earn a variable rate that adjusts every six months based on inflation, making them useful when you want protection against rising costs—like the price of materials for home maintenance or property improvements.

Key Takeaways

  • Series EE bonds earn a fixed rate of interest for 30 years, while Series I bonds earn a rate that changes every six months based on inflation.
  • You must hold a savings bond for at least one year before you can cash it in, and you lose the last three months of interest if you cash it before five years.
  • Savings bonds are purchased through TreasuryDirect, the official government website, at face value (you pay $50 for a $100 bond in electronic form).
  • Interest earned on savings bonds is exempt from state and local income tax, though you owe federal tax when you cash the bond or it matures.
  • Savings bonds are not FDIC-insured because they are Treasury securities, but they carry no default risk because they are backed by the U.S. government.

How to buy savings bonds through TreasuryDirect

You buy savings bonds directly from the U.S. Treasury through TreasuryDirect, the official government website at treasurydirect.gov. You cannot buy them from a bank or broker. To start, you create an account with your Social Security number, email address, and a bank account for electronic transfers. The process takes about 15 minutes and requires no fees.

Once your account is set up, you choose the bond type (Series EE or Series I), the amount you want to invest (minimum $25 per bond), and the quantity. The money is withdrawn from your bank account, and the bonds are held electronically in your TreasuryDirect account. You receive no physical certificate—everything is digital. You can buy up to $10,000 in electronic bonds per calendar year per bond type, so a maximum of $20,000 total if you buy both Series EE and Series I.

Interest rates and how they are set

Series EE bonds currently earn a fixed rate that the Treasury announces every six months, on May 1 and November 1. The rate you receive is locked in on the date you purchase the bond and never changes. The Treasury sets this rate based on the average yield of five-year Treasury notes, so it moves with broader market conditions. You can check the current rate on TreasuryDirect before you buy.

Series I bonds work differently. The interest rate has two parts: a fixed rate (set by the Treasury and locked in for the life of the bond) and an inflation rate (adjusted every six months based on the Consumer Price Index). The combined rate is announced on May 1 and November 1. If inflation rises, your Series I bond rate rises with it. If inflation falls, your rate falls but cannot go below the fixed portion. This makes Series I bonds a hedge against rising home maintenance costs or property tax increases.

When you can cash in your bonds and what penalties apply

You must hold a savings bond for at least one year before you can cash it in. If you try to redeem it before one year has passed, TreasuryDirect will not allow the transaction. After one year, you can cash the bond anytime through your TreasuryDirect account, and the money is deposited into your bank account within a few business days.

If you cash the bond before five years have passed, you lose the last three months of interest. For example, if you hold a bond for two years and then cash it, you receive interest only for 21 months, not 24. After five years, you can cash the bond without this penalty and receive all interest earned. The bond continues to earn interest for up to 30 years if you do not cash it, though most homeowners cash them well before maturity.

Taxes on savings bond interest

Interest earned on savings bonds is subject to federal income tax, but it is exempt from state and local income tax. You do not pay tax on the interest until you cash the bond or it reaches final maturity at 30 years. This means your interest compounds tax-free while the bond is held, which is one reason they appeal to long-term savers.

When you cash the bond, you receive a Form 1099-INT from TreasuryDirect showing the interest earned. You report this on your federal tax return for the year you cash it. If you hold the bond until it matures at 30 years without cashing it, you owe tax on all accumulated interest in that final year. Some homeowners use this feature to their advantage by cashing bonds in years when their income is lower, reducing the tax owed on the interest.

How savings bonds compare to other ways to save for home expenses

Savings bonds offer safety and tax advantages, but they earn less interest than many other options. A high-yield savings account at a bank currently earns more interest than most Series EE bonds, though Series I bonds may be competitive when inflation is high. The trade-off is that savings account interest is fully taxable and you can withdraw money anytime without penalty, whereas savings bonds lock your money away for at least one year and charge a penalty if you withdraw before five years.

Certificates of deposit (CDs) offer higher rates than savings bonds but are also fully taxable and carry early withdrawal penalties. Money market accounts are more flexible but typically earn less. For homeowners who want absolute safety, tax advantages, and do not need the money for several years, savings bonds make sense. For money you might need sooner or want to access without penalty, a high-yield savings account is usually better.

What happens if you lose access to your TreasuryDirect account

Your bonds are held in electronic form only, so if you forget your TreasuryDirect password or lose access to your account, you can still recover it. TreasuryDirect has a password reset process and can verify your identity using your Social Security number and other information. If you die, your bonds become part of your estate and can be transferred to your heirs through the probate process or directly if you have named a beneficiary in your TreasuryDirect account.

You should keep a record of your TreasuryDirect login information and the bond details (purchase dates, amounts, and bond types) in a safe place, such as a safe deposit box or with your other important documents. If you are using savings bonds as part of a long-term home savings plan, let a trusted family member know where this information is stored so they can access it if needed.

Frequently Asked Questions

Can I buy savings bonds as a gift for someone else?

Yes. You can purchase Series EE or Series I bonds as gifts through TreasuryDirect. The recipient must have a TreasuryDirect account, and you transfer the bonds to them after purchase. The recipient then owns the bonds and controls when to cash them. This is a common way to give money to children or grandchildren for future education or home-related expenses.

What is the difference between Series EE and Series I bonds for a homeowner?

Series EE bonds earn a fixed rate that never changes, making them predictable if you want to know exactly how much you will have in five or ten years. Series I bonds earn a variable rate that rises and falls with inflation, making them better if you are worried about the cost of future home repairs or materials increasing. Choose Series EE if you want certainty; choose Series I if you want inflation protection.

Do savings bonds count against my borrowing power for a mortgage?

Savings bonds do not count as debt and do not appear on your credit report, so they do not reduce your borrowing power for a mortgage. However, if you cash a bond shortly before applying for a mortgage, the lender may ask about the source of the funds. Lenders want to see that down payment money has been in your account for at least two months, so plan ahead if you intend to use bond proceeds for a home purchase.

What happens to my savings bonds if the U.S. government defaults?

Savings bonds are backed by the full faith and credit of the U.S. government, meaning they carry no default risk. If the government were unable to pay, the entire financial system would have already collapsed. Savings bonds are considered the safest investment available to individual savers, which is why they earn lower interest than riskier options.

Can I use savings bonds as collateral for a loan?

You cannot pledge savings bonds held in TreasuryDirect as collateral because they are held electronically and cannot be transferred to a lender. Some banks will lend against physical savings bonds if you have them in paper form, but new bonds are issued only in electronic form. If you need to borrow money, a home equity line of credit or personal loan is a more practical option than trying to use savings bonds as security.