Should You Break an Old CD Contract to Get a New CD at Today’s High Rates?

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If your CD from last year has a rock-bottom rate, is it worth withdrawing for a new CD contract? Here’s the math you need to know. 

If you locked into a certificate of deposit (CD) last year, you may be looking at today’s rates through watery eyes. Not only have CD rates exploded to levels we haven’t seen in decades, the Federal Reserve’s rate hiking campaign may push them even higher. That raises a compelling question for previous CD owners: Should you break a CD contract to lock into today’s jaw-dropping rates? Let’s take a look.

Yes, if the interest you would earn is greater than the penalty you would pay

Unless you have a no-penalty CD, your CD contract likely has a clause stipulating early withdrawal penalties. Often, the penalty for withdrawing early means forfeiting a portion of the interest you’ve earned, along with the closure of your CD account. In general, the longer your CD term, the more hefty the penalty. And yes, the penalty can exceed the amount of interest you’ve accumulated.

That said, if the interest you forfeit is less than the interest to be gained on a new CD contract, it might be worthwhile to break your contract.

Let’s look at an example. Let’s say you’ve deposited $5,000 into a 2-year CD with a rate of 2.50% and the penalty for withdrawing early is six months of forfeited interest, which would be $62.50. You’ve earned 13 months of interest, which is about $135.42. If you were to walk away now, you would be left with $72.92 after the penalty is deducted.

You weren’t thinking about walking away, until you saw a 5.51% rate on a 12-month CD. At that rate, you would earn $275.50 after 12 months. That seems like a pretty good deal, but is it worth breaking up with your old CD?

In this case, it would be worth breaking the old CD contract. If you keep your money in the old CD, you’d be left with $250 in interest after the CD term ended in 11 months. The new CD would earn you about $275, a difference of only $25. But if we add in the $72.92 from the old CD, you’d have $347.92, almost $100 more than if you had kept your old CD.

Do the math for yourself

Take a look at your CD contract and figure out if you’ll come out on top by closing a CD and opening a new one at today’s rates. If the difference between the forfeited interest and the interest you would earn is positive, then nine times out of 10 you’ll likely fare well breaking up with your old CD.

The best CD rates right now come with short terms, such as 6 months or 1 year. But you might find a compelling rate on a long-term CD, such as:

3 years4 years5 years

One thing to consider is that CD rates may or may not have peaked. The Fed is watching the economy carefully and isn’t afraid to raise rates if it thinks it will help it achieve its inflation goals. If the Fed raises rates again, CD rates would likely get a tiny bump.

That’s not to suggest you should try to time the CD market and open one when rates hit their peak (whenever that is). But you may have some time to let your current CD accumulate interest — or perhaps even mature — before you close your account and pay the penalty. Either way, closing an old CD for a new one is certainly worth considering, especially if your old CD has a rock-bottom rate (like 1% or lower). Take a peek at today’s top-paying CDs and see if it’s worth breaking your contract for one.

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