I Bought a Long-Term CD and Rates Have Moved Higher, What Should I Do?

As interest rates have moved up on longer-term CDs, many have found themselves in a quandary over what to do about longer-term CDs that they may have purchased over the last couple of years and that are now yielding less than the going rate.

In fact, I myself find myself in such a position, having purchased a 5-year CD from a major online back 2 years ago at 2.25%. With BestCashCow now showing 3-year CD rates at 2.60% and with the ability to get out of the CD with a 6-month early withdrawal penalty, I can already cover my losses from the penalty by rolling into a higher yielding CD.

With rates points to rise still further, this strategy locks into one early withdrawal penalty and runs a high risk of a second one. It accomplishes little other than a psychological benefit of allowing me to feel like I am still getting the best CD rate.

Since rates may rise further between now and the end of the year, and still further into next year, I have chosen to adopt a separate strategy. My strategy involves resolving, as I have, that I will ultimately need or want to terminate the CD that is earning 2.25% before the end of its term three years from now. That will cost me 6 months of interest (or 1.25% the initial CD price) whenever I pull the trigger. But, rather than do this now and risk getting another CD which may quickly wind up paying below the best rates, I have decided to treat this outstanding CD as if it were cash or a short term CD. Since 2.25% is still better than what I can get in a savings or a one-year CD, I will hold the CD for now.

When savings and short term CD rates have moved meaningfully above 2.25%, I will reconsider my position (unless there is only a very short period left of the CD at that time).

This situation underscores the importance of looking for CDs with reasonable early-withdrawal penalties. We consider 3 months of interest to be a reasonable penalty on a 1-year CD and 6 months of interest to be a reasonable penalty on a CD longer than 1 year. Also, as we noted in this article, the bank or credit union’s terms may grant it discretion whether to honor your early withdrawal request. You can lessen the risk of an early withdrawal being denied by only opening CDs with larger, recognized online banks.