After getting my email to subscribers about the 3% 7-year CD last week, a reader asked me how to decide whether it’s worth breaking an existing 2% CD with 2 more years to go in order to get into a new 7-year CD at 3%.
DepositAccounts.com offers a When to Break a CD Calculator. However, it assumes the new CD has the same term as the remaining term on the existing CD. In other words, it compares keeping a CD for 2 more years until maturity with breaking the CD now and getting into a new 2-year CD. Here this reader was asking about
- Keeping the current CD for 2 years and buying a new 5-year CD when it matures; versus
- Breaking the CD and buying a new 7-year CD now.
The missing piece of information is what rate you can get when you buy a 5-year CD in 2 years. Nobody knows, but you can guess. If the rate 2 years from now is low, you are better off breaking the CD and getting into a higher rate now. If it is high, you may be better off just waiting until your current CD matures and getting into a higher rate then.
I didn’t find a calculator for this situation when I did a quick Google search. So I made one myself. Enter the numbers directly into the calculator below. It will do the math for you.
You enter the information about your existing CD and the new CD you are considering: the rates, the remaining term on the existing CD, the term of the new CD, and the early withdrawal penalty on each CD. You enter a guess of the rate when your existing CD matures. The calculator then tells you how much more you will get if you break the existing CD and buy a new longer term CD now. If that number is negative, it means you should keep the existing CD and just wait.
Because it automatically calculates, you can experiment with your guess of the rate in the future, from very low to very high. You will see how the comparison changes.
I used the numbers the reader gave me as an example: a 2% CD with 2 years remaining and an early withdrawal penalty of 2 months of interest, versus a 3% 7-year CD with an early withdrawal penalty of 6 months of interest. If in 2 years the rate on a 5-year CD is low, you are better off breaking the CD now, because otherwise you just sat on 2% for 2 years for nothing. If the rate in 2 years is high, say 6%, you also have the option to break the 3% CD again in order to get into a 6% CD at that time. The calculator also takes that into account.
In this specific example, because the early withdrawal penalty is low, it turns out you are better off breaking the 2% CD with 2 years remaining for a new 3% 7-year CD whether the rate on a 5-year CD in two years is 1% or 10%. It can go the other way if the rates and the early withdrawal penalties are different.
Next time you run into a situation like this, plug in your own numbers and see what the calculator says.