Interest rates are very, very low right now. On top of that, the first “rung” on our CD ladder is coming up for renewal next week. We should be rolling that money into a new five year CD, but is that a good idea given current CD rates?
When we first started our CD ladder (Novemeber 2008), we bought a one, two, three, four, and five year CD. Rates topped at out 5.15% for the five year CD, and our overall average was 4.66%.
Fast forward to today… We’re now looking at 3.35% APY for a five year CD at the same bank — nearly 2% lower. On the surface, we should probably run away kicking an screaming, but when you dig deeper, the situation isn’t too bad.
If we roll that lowest rung into a new five year CD, the average rate will dip to a bit under 4.50%, which still isn’t too shabby. The big concern, of course, is that interest rates will spike and we’ll be locked in at a low rate. Then again, we can escape with “just” a six month interest rate penalty.
In other words, if we can hang on for a year or so, our effective interest rate would be roughly half the current rate (around 1.70%). If we make it for 18 months, we’d take home 2/3 (just under 2.25%), and so on.
When viewed in that context, the situation isn’t nearly so bleak. If rates jump, we can simply break the CD and re-deploy our cash. Sure, we’ll give up some interest earnings, but our money will still have performed on par with prevailing high yield savings rates, so we’re not risking much.