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Ask the expert: How can I get the best CD rates for a 5-year term?

May 18, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I have $40,000, and I found a five-year CD available at 2.25 percent. Does that sound like a good deal, and is a five-year CD a good idea?

A: According to the FDIC, five-year CD rates nationally are averaging 1.63 percent. So, the 2.25 percent rate that you found is certainly an above-average deal. However, the best CD rates may be even higher. Before you commit, check MoneyRates.com for the best CD rates available today, to make sure you are getting the most favorable deal you can.

As for the broader question of whether a five-year CD is a good idea at this time, there are two things to consider - your needs, and the market situation.

In terms of your needs, if you are confident that you won't need this money for five years, then this is a good fit. If you want to get the highest rates available without getting any riskier than a deposit account, then as a general rule the longer you can commit to a CD, the better you will do.

As for market conditions, that's where you might have reason to pause. CD rates are unusually low right now. There's no guarantee they will rise within the next five years, but history suggests that there is a good chance of this happening. With inflation also on the rise, you have an especially strong reason to want to avoid getting locked into an unnaturally low CD rate for too long. So, there are two ways you might hedge against this risk:

  • Split your money between a five-year CD and a shorter-term deposit, such as a savings account, money market account, or shorter-term CD.
  • Look for a CD with a small early-withdrawal penalty. This will give you the flexibility you need if rates rise significantly in the next five years.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to the "Ask the Expert" feature. Just go to the MoneyRates.com home page, and look for the "Ask the Expert" box on the lower left.

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