5-Year CD Rates Are Up 400% in 2 Years. Should You Invest Now?

There are certain benefits to opening a CD instead of putting your money into a savings account. For one thing, a CD might pay a higher interest rate than a savings account, depending on the length, or term, of that CD.

And also, with a CD, your interest rate is guaranteed. If you sign a 12-month CD at 5% interest, you will earn 5% on your money for the year that follows. On the other hand, it may be that your bank is paying 5% interest on savings accounts right now. But that rate could fall to 4.8% next month, 4.6% the month after that, and so forth, because your rate is not locked in.

Opening a CD means making a big commitment. If you cash out a CD early, you'll generally face a steep penalty from your bank, the exact amount of which depends on the term of your CD and your financial institution's rules. By contrast, you can withdraw funds from a regular savings account at any time without penalty.

Meanwhile, because CD rates (and savings accounts rates) are up following a series of interest rate hikes on the part of the Federal Reserve, now's a good time to open a CD. And you may be inclined to open a longer-term one so you can lock in a favorable rate for a number of years.

In fact, the average five-year CD rate was 4.23% as of September, according to Federal Reserve data. That's a 400% increase over the past two years.

But is opening a five-year CD a smart move? Or is it a decision you might regret?

The upside of opening a five-year CD right now

If you're going to open a 60-month CD, now's a good time to do it. Not only are CD rates up, but the Fed is likely to start cutting rates next year in response to cooling inflation. Once that happens, CD rates could drop -- and quickly. So you may not have too many more opportunities to lock in a rate for a five-year CD that's as high as what you'll see today.

Plus, as long as your bank is FDIC-insured, your CD is risk-free, assuming your deposit doesn't exceed $250,000. It's not an easy thing to lock in a return of 4% or more without assuming any risk.

The downside of opening a five-year CD right now

Although CDs are paying generously right now, when you put your money into one, you're making a commitment. But a lot can change over five years. You may end up having to make costly home repairs, or you might burn out at work and need a break or career switch that you're reliant on your cash reserves to fund. If your money is tied up in a CD, that becomes problematic.

Of course, you can technically cash out a CD early if you absolutely need that money. But then you'll face a costly penalty that hinges on where you do your banking. At Capital One, for example, the penalty for cashing out a five-year CD early is six months' worth of interest.

Also, while you might snag a risk-free return of 4% or more on a five-year CD right now, over the past 50 years, the stock market's average annual return has been 10%. So you might grow your money a lot more by investing it.

Of course, with stocks, you're also taking the risk of losing money -- especially if you're only planning to invest over a five-year period. But you should at least be aware that while a return on your money in the 4% range isn't anything to scoff at, it's also well below the stock market's average return.

What's the right choice?

All told, there are pros and cons to opening a five-year CD right now. Think about your goals and financial picture in the course of making your decision.

If you have plenty of extra cash in other accounts, then opening a 60-month CD becomes less risky. And if you have a five-year goal you're saving for, like paying for college tuition, then a CD could be a much safer bet than the stock market.

Remember, too, that if you aren't comfortable with the idea of a five-year CD, you could always open one with a shorter term -- such as a two-year CD. That way, you're not making quite the same commitment, but you're still getting a pretty generous return on your cash.