Should I invest in a long term CD with a better rate or a short term CD at a lower rate and hope rates increase in the short term?
You may be surprised to find that long-term CDs can be much better deals than short-term CDs even if you think interest rates will rise substantially in the next year or two. If interest rates stay low, the long-term CDs are better since the interest rates are much higher than short-term CDs. If interest rates rise substantially, you can close the long-term CD early. You'll be hit with an early withdrawal penalty, but for many banks and credit unions, the early withdrawal penalty is mild. With a mild early withdrawal penalty, the long-term CD closed early can return more than short-term CDs that you hold to maturity. It can also be better than just keeping your money in a savings account.
Two institutions which have competitive long-term CD rates and mild early withdrawal penalties are Ally Bank and Pentagon Federal Credit Union.
There are two risks with this long-term CD strategy:
- The bank refuses to allow an early withdrawal
- The bank increases the early withdrawal penalty on your existing CD