Should You Break a CD Contract to Get a New CD at a Better Rate?

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If you locked into a certificate of deposit (CD) a couple years ago, you might be looking at today's rates through teary eyes. The national average 12-month CD rate in August 2022 was about 0.31% APY, according to the Federal Deposit Insurance Corp, while the current rate is almost six-times that (1.85%). And that doesn't even come close to the APYs on top-paying CDs , which are still above 5.00% for some terms.

That might lead you to ask a compelling question: If you have a CD with a very low rate, should you break your contract to get a CD with a higher APY? Let's take a look.

Breaking an old CD contract will cost you in penalties and opportunity costs

Unless you have a no-penalty CD, you'll pay an early withdrawal penalty to break your old CD contract. Most penalties are equal to a certain number of days' worth of interest (like 90 days) and will be deducted from the interest you've already earned. If your earned interest doesn't cover the full penalty, the rest will be deducted from your principal.

You also have to think about opportunity costs; in this case, the interest you would have earned had you kept your old CD contract intact. In general, if the forfeited interest and early withdrawal penalty are significantly less than the interest to be gained on a new CD, breaking your contract is worth it.

For example, let's say you put $15,000 in a 3-year CD in August 2022, when the national deposit rate was 0.47%. At this point, you've earned roughly $141 in interest and stand to earn about $71 more. Let's also assume that this CD's early withdrawal penalty is one year of simple interest. This would be about $71, rounding up.

The total cost of breaking this CD, then, would be $142: $71 in opportunity costs and $71 in penalties.

Now, let's say you're looking at another 3-year CD being offered now. Let's say it's a CD offering a superb 4.40% APY. If you were to put $15,000 into this CD, you would stand to gain about $2,068 over the life of your CD. I'm no mathematician, but earning $2,068 seems like a lot better deal than finishing your current CD's term to retain $142.

The math doesn't always work in your favor

If your situation is similar to the example above, your path forward is clear: Break the CD contract and get a new one. Things get more complicated, however, when the interest you stand to gain isn't meaningful.

For example, let's say instead of 0.47%, your 3-year CD has a 3.50% APY. With the same conditions as above, you've earned about $1,068 in interest and stand to gain another $562 if you finish out your CD contract. The early withdrawal penalty is the same (one year of simple interest), but since your APY is higher, you're going to lose $525. Now, breaking your CD would result in a loss of roughly $1,087.

In this case, you would still come out ahead if you broke this CD to open a new 3-year CD with a 4.40% APY. But your earnings wouldn't be as lucrative as, say, breaking a CD with an APY of 0.47%.

Then again, you're still earning more money than keeping your old contract. Ultimately, that's what matters -- coming out ahead financially. Check the math for yourself and see if it's worth the effort to break your old CD contract for one of today's best rates.

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