Take this example: You have a 24-month CD getting 1.65% interest, which is the current national average according to BankingMyWay.com. The interest is compounded monthly and there is a 90-day interest penalty for early withdrawal. After holding onto the CD for 12 months you notice that CD rates have risen to 2% and wonder if you should cash out and reinvest. When you crunch the numbers, you see that if you break the CD and reinvest at the higher rate, you’ll end up with $10,327.13 at the end of one year (when the old CD would have matured). If you keep your current CD, your ending balance will be $10,333.74. In this example you will have lost $6.61 by breaking the CD.
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If, on the other hand, the new CD rate was 2.08% or above, you would move into profit-making territory by breaking the CD and reinvesting. So, determining when to cash out a CD is basically a factor of determining what new CD interest rate is high enough to compensate for the interest penalty from breaking the old CD. If you are concerned about rate increases in the future, consider the benefit of flex CDs, which MainStreet recently outlined.
Related Stories:
Parallel CDs: An Alternative to Ladders
Building a CD Ladder for Steady Income
—For the best rates on CDs, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.
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