Should I Break My Bank CD Early and Pay The Early Withdrawal Penalty?

Interest rates continue to rise, and holders of existing certificates of deposit (CDs) may be wondering if it is a good idea to break their current CDs in order to take advantage of a new higher rate. Most CDs impose an early withdrawal penalty if you take money out before the CD matures. But the new rate is good enough, you might breakeven soon. This question is actually not that simple, as there are a few potential variables involved:

• Existing CD: interest rate, maturity date, and early withdrawal penalty?
• New CD: interest rate, maturity date, and early withdrawal penalty? Which term length is best?
• How special is the new CD offer? Is it likely you’ll get the same rate in few months?
• Future CD rates? What if the terms actually get better in the future?
• Judgement date? One option may win after 2 months, but another might win after 1 year. What is the date of breakeven?

You can get an idea of the most recent top rates in my monthly interest rate roundup. All that said, here are two resources that can help you make the decision.

DepositAccounts has a simple CD Calculator that asks for the existing CD rate/length/penalty information but only the rate on the new CD. The calculator makes the simplifying assumption that your judgement date is the maturity date of the existing CD.

There are some potential issues, though. What if your new CD has a high interest rate but lasts another 5 years and has a huge early withdrawal penalty? You may come out ahead for the moment, but you’d be locking yourself in for another long period. There are scenarios where I might not agree with the conclusion given by this calculator.

The Finance Buff has a more detailed CD Calculator that requires more inputs and a bit of guessing. You will need to supply the new CD rate/length/penalty information and also guess the future rates when your existing CD matures. This calculator is more complex but gives you a more nuanced view of what happens both (1) when your existing CD matures and (2) when your new potential CD matures. Now you have essentially two judgment dates instead of one.

If a coder was willing to spend a little time, they could probably create a better calculator with a chart that would show visually how the interest (taking into any withdrawal penalties) would change over time for two (or more) different CD options. Essentially, it could compare results across multiple judgment dates. You could also calculate the breakeven date. (Future project, but if you have already done it, let me know and I’ll link to it here.)

Bottom line. If it were me, I’d use both of the two calculators above and get a rough answer. If it’s a slam dunk, then go for it. If the answers are close, I would probably only break the CD if it was an especially good promotional rate that was higher than the competition, like the expired Sharonview 4% APY CD earlier this year. Otherwise, the markets are suggesting that rates are likely to keep rising. I’d also make sure the new CD is not too long for my needs and that is has a reasonable early withdrawal penalty.