CD Rates Are Already Falling. Is Now the Time to Lock in a 5% APY?

The Federal Reserve raised the federal funds rate a whopping 11 times between March 2022 and July 2023. It's made it much more expensive for banks to borrow money from one another and they pass that buck along to consumers, which is why loans have looked unappealing for a long time now.

If there's been one bright spot, it's been that banking products, like certificates of deposit (CDs), have offered much higher interest rates, especially over the last year. However, rates started to dip back in January 2024, and they're not showing signs of recovery. Some see this as their last chance to lock in a 5.00% APY before CD rates like these disappear, but there are a few things you should know before you do that.

Which CDs offer the best rates right now?

CD interest rates vary quite a bit depending on the bank and term you're looking at. Generally, long-term CDs -- those with term lengths of 12 months or more -- have the highest interest rates. But that's not what we're seeing right now.

Currently, the best 1-year CD rates are right around 5.00% while the best 5-year CD rates are closer to 4.00%. This is because short-term CD rates are quicker to change due to things like a Fed rate hike. Long-term CD rates are based on longer-term estimates of what interest rates will do. Since they're expected to drop soon, banks are less willing to offer their top rates on these accounts.

This leaves consumers interested in CDs in a curious spot. They could go after the highest rates, but they won't earn them for very long. Or they could settle for a lower rate, which they could lock in for longer.

The right move for you depends on a couple of factors. The first is how long you can stand to part with your money. Though you're technically free to withdraw cash from a CD at any time, an early withdrawal leads to a penalty -- usually several months of interest payments. It's best to avoid this when you can. So you don't want to open a long-term CD if you expect to spend those funds in a year or two. In that case, a short-term CD is the way to go.

If you don't need your money anytime soon, a longer-term CD could be the smarter move in this rate environment. Imagine you have $5,000 to invest in a CD. You could put it in a 1-year CD with a 5.00% APY or a 5-year CD with a 4.00% APY. The 1-year CD would make you $250, bringing your total balance to $5,250. But the 5-year CD would make you $1,083.26, leaving you with over $6,000 at the end of the CD term.

It's a bigger payout, but it leaves your money tied up for a lot longer. Because of this, opening a single CD is rarely your best bet.

How to grow your cash while keeping it accessible

A high-yield savings account is a great alternative to a CD if you're uncomfortable locking your money away where you can't access it. These accounts enable you to withdraw your funds at any time. There's usually no penalty, though some banks may charge you a fee if you make too many withdrawals per statement cycle.

The best high-yield savings accounts currently have APYs close to 5.00%, putting them on par with the best CD rates. But the savings account rates aren't locked in. As bank account rates continue to fall, high-yield savings accounts will make less. But for many, the ease of access makes this an acceptable tradeoff.

If you're determined to open a CD, though, you might prefer a CD ladder instead of putting all your cash in one account. A CD ladder is where you open multiple CDs of different lengths and put an equal amount of money in each. A classic example is a 1-, 2-, 3-, 4- and 5-year CD ladder.

When the 1-year CD term ends, you can spend it, move that cash somewhere else, or stick it in a new 5-year CD. Then, you do the same thing with the 2-year CD, and so on. This gives you access to a portion of your savings every year while still enabling you to earn the higher rates that long-term CDs typically offer.

It's worth weighing all your options before deciding where to put your cash. Spending a few hours or a few days to explore the rates on some top savings accounts and CDs isn't going to cost you a ton in lost interest, even if rates drop a little in the meantime. Take your time and make sure you're comfortable with your decision.