There are benefits and drawbacks to putting money into a certificate of deposit (CD). On the plus side, you'll often be looking at a higher interest rate on a CD than a savings account. And also, the interest rate on your savings account can change from week to week. But when you lock in a CD, you're guaranteed to continue receiving the rate you signed up at for the length of your CD's term.
Of course, the downside of putting money into a CD is that you'll be penalized for withdrawing your money early. The exact penalty will depend on your bank, but three months of interest is a common penalty for cashing out a 12-month CD before it comes due. And also, when you put money into a CD, you commit to that day's rate. But if rates rise a week or so later, you're stuck, whereas with a savings account, your interest rate simply adjusts upward.
If you have money you don't need for near-term goals or emergency expenses, then now's actually a good time to start thinking about opening a long-term CD -- say, one with a 48- or 60-month term. And there's a big reason why.
Lock in that rate before interest rates fall
The main reason CDs are paying so generously right now is that the Federal Reserve has raised interest rates numerous times since early 2022 to cool inflation. Of course, an unwanted side effect of those rate hikes is higher borrowing rates for loans and credit cards. But savers at least get to benefit.
At this point, though, it looks as if the Fed is done raising interest rates. In fact, the central bank actually opted to pause its interest rate hikes at its last three meetings. And the Fed has also indicated that it may be looking at cutting rates at some point in 2024.
That would be a good thing for consumers, many of whom are buckling under the weight of expensive credit card and loan interest rates. But it could also lead to lower CD rates, as well as lower interest rates in savings accounts.
That's why you may want to open a longer-term CD in the coming weeks. Once the Fed cuts rates, CD rates are apt to fall. If you open a long-term CD soon, you can lock in a generous rate for many years.
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
Can you afford to part with the money?
It's one thing to lock some cash away in a 1-year CD. A 5-year CD is a much bigger commitment.
Before you open one, ask yourself:
- Am I happy with my emergency fund, or should I boost it?
- Do I have near-term goals I might need cash for?
- Will I have big expenses to pay for in three or four years, like college tuition or a new car?
If you're confident you can afford to tie up your money for a lengthy period of time, then now's a really good time to open a long-term CD. But if you're not sure you won't need that money, then you're better off sticking to a shorter-term CD, or even just keeping your money in a regular savings account.
FAQs
While it depends on your goals, financial needs and other factors, this could be the right time to lock in a long-term CD rate, experts say. Many short-term CDs currently offer higher interest rates than long-term CDs, but longer-term CDs could pay more in the long run — especially if rates drop soon.
Should I lock in a long-term CD now? ›
So today's rates are a bit of an anomaly. No one knows when they could return or what could spark them to rise again. So by locking in a long-term CD rate now, you could earn today's high returns for years to come, even as the larger rate climate cools back down.
Is now a good time to put money in a CD? ›
If you're in a position to save in today's higher interest rate environment, investments like CDs could help accelerate your savings. CD rates have skyrocketed since 2022: 1-year CD rates have increased more than twelve-fold, with 3-year and 5-year CDs up nearly six-fold and five-fold, respectively.
Are CD rates expected to go up in 2024? ›
Financial markets don't expect CD rates to go up in 2024. The Federal Open Market Committee (FOMC) is expected to issue a rate cut in the last half of 2024, which would likely lower CD interest rates.
Why should you deposit 5000 in CD now? ›
You're guaranteed to earn hundreds of dollars
But an 18-month CD with a deposit of $5,000 can do just that. Whether you lock in a rate of 4.50%, 4.75%, 5.00%, or somewhere in between those ranges, you'll earn upwards of $300 in interest once the account has matured.
What is the disadvantages of the longer term CD? ›
Long-term CDs generally have higher early withdrawal penalties than short-term CDs. You'll also have less account flexibility because you'll have to wait a longer timeframe before your account reaches maturity.
What is the biggest negative of putting your money in a CD? ›
The cons of CDs
With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.
Can you get 6% on a CD? ›
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
What is the best CD rate for $100,000? ›
Compare the Best Jumbo CD Rates
| Institution | Rate (APY) | Minimum Deposit |
|---|
| Connexus Credit Union | 5.10% | $100,000 |
| Lafayette Federal Credit Union | 5.09% | $100,000 |
| EFCU Financial | 5.05% | $100,000 |
| Consumers Credit Union | 5.05% | $100,000 |
12 more rowsThe Top CDs for Locking Your Rate Until 2025 to 2027
| Best 1-Year CDs - Mature Early 2025 | APY | Minimum |
|---|
| Financial Resources Federal Credit Union | 5.43% | $ 500 |
| Best 18-Month CDs - Mature Later 2025 | APY | Minimum |
| XCEL Federal Credit Union | 5.45% | $ 500 |
| Fortera Credit Union | 5.35% | $ 1,000 |
20 more rowsFeb 28, 2024
Top CDs That Will Mature in 2027
| Bank or Credit Union | APY | Minimum |
|---|
| Credit Human | 4.75% | $500 |
| EFCU Financial | 4.75% | $500 |
| Luana Savings Bank | 4.70% | $2,000 |
| MYSB Direct | 4.70% | $500 |
10 more rowsJul 11, 2024
Certificates of deposit with at least 5% interest
| Institution | Most Competitive CD Term | Highest CD APY Available |
|---|
| Bask Bank | 6 months* | 5.00% |
| Bank5 Connect | 6 months | 5.05% |
| Newtek Bank | 6 months* | 5.05% |
| Popular Direct | 3 months | 5.05% |
10 more rows7 days ago
• Fannie Mae: Rates Will Decline to 6.4%
The August Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 6.4% by year-end, a slight decline from 6.6% in the third quarter. All told, the mortgage giant predicts mortgage rates will average 6.7% in 2024 and 6% in 2025.
Is now a good time to lock in CD rates? ›
Bottom line
A long-term CD can be a good fit for money that you won't need during the CD's term. Locking in a longer-term CD now could help you preserve purchasing power if rates were to drop in the future.
Is it better to have one CD or multiple? ›
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
Should I buy a CD now or wait for higher rates? ›
The decision to open a CD now or wait depends on many factors, including interest rates, when you'll need to access the funds and the state of your emergency fund. In general, when rates are high — as they are now — opening a CD allows you to maximize your earnings even if rates go down in the future.
How long should you keep money in a CD? ›
Midrange CDs that are between a year and three years, could be a good option if you want to save for something like having a baby. And long-term CDs that stretch beyond that could be good for extended savings goals.
When should I close my CD account? ›
Certificates of deposit (CDs) can be closed when they reach their maturity date or before if necessary. If you decide to close a CD before it matures, you generally have to pay a penalty.
Why should you put $15000 into a 1 year CD now? ›
In summary, a certificate of deposit gives you steady and safe returns. Investing $15,000 in a CD could lead to substantial gains, regardless of the CD's length. However, make sure you won't need that money while the CD is active because withdrawing early usually incurs hefty penalties.
Should I close a CD early to get a better rate? ›
Paying an early withdrawal penalty could also make sense if your CD is earning considerably less than current interest rates. For example, if you have a long-term CD earning a 2% APY, and new CDs offer APYs in the 5% range, you should consider cashing out your long-term CD as it could mean earning 3% more on your cash.
