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Long Term CD Rates to Move Even Higher in Coming Months

The stage is finally set for long term CD rates to move higher in the coming months after years of low rates. Long term rates, 3 year to 5 year rates have already moved higher since late April. Back on April 30th, Monitor Bank Rates reported the average 5 year CD rate was at 1.26 percent.

The national average 5 year CD rate this week is at 1.31 percent. While a gain of 0.05 percent over three months is nothing to write home about, rates are finally headed higher. Last week the national average 5 year CD rate was even higher at 1.34 percent.

Long Term CD Rates Already Moved Higher

Bigger gains in CD rates will take place in the coming months as the Federal Reserve winds down their purchasing $45 billion a month in long term U.S. bonds. Bank CD rates will trail bond yields in moving higher but the Federal Reserve might end their purchases as soon as September, which will mean higher long term CD rates by the end of 2013.

Average 5 year rates are at 1.31 percent this week but the best CD rates available on 5 year CDs are much higher. Since April, the best 5 year rates also moved much higher than the average. In late April, the best 5 year rate in our rate database was from Nationwide Bank at 1.69 percent with an APY of 1.70 percent.

CD Rates at Banks Differ for the Same CD Product

This week the highest CD rates in our 5 year rate database are over 2.00 percent. The highest rate is from EverBank at 2.04 percent with an APY of 2.06 percent. The second highest 5 year rate is from iGObanking at 2.03 percent with an APY of 2.05 percent.

As you can see, the recent increase in rates at some banks and credit unions is a good reminder to shop around and compare CD rates. The rate differences between different financial institutions can be rather large for the same CD product. For example, the highest 5 year rates in our database are just above 2.00 percent and the lowest 5 year rates are from Citizens Trust Bank at 0.60 percent.

Compare Returns Using a CD Calculator

A rate difference of 1.46 percent between these two banks over 5 years can add up. Using a CD calculator, you can see depositing $100,000 over 5 years with a CD rate of 2.06 percent (compounded monthly) will earn $10,728.76 in interest. The same $100,000 invested in a 5 year CD with a rate of 0.60 percent (compounded monthly) will earn only $3,044.68 - that yields a substantial difference.  You can earn $7,684.08 more in interest by taking the time to shop around instead of using your existing bank as your given CD provider. It always pays to look around for the best rates to make sure you're earning the most interest you can on CDs.

Pay Attention to Certificates of Deposit Maturing

Another mistake that can cost a lot of money is not paying attention to CD accounts that are maturing. This point is especially important to long term CD accounts that are maturing right now. 5 years ago you could easily lock in a 5 year CD rate around 5.00 percent but the average rate right now is 1.31 percent.

You could be in for a rude awakening if your 5 year CD account is automatically renewed for another 5 years at a low rate. Another point is that even if you have a long term CD account maturing right now, you would probably prefer to reinvest in a shorter term CD to take advantage of interest rates finally moving up in the near future. You don't want to lock into a long term CD with current rates so low. Stay invested in CD accounts of 1 year or less so you can take advantage of higher rates when they finally do arrive. The best CD rates right now in Monitor Bank Rates' database on 1 year CDs is at 1.04 percent with an APY of 1.05 percent.
Author: Brian McKay
August 11th, 2013