Should you open short-, mid-, or long-term CDs?

With the Federal Reserve repeatedly raising interest rates since 2022, many banks and credit unions have, in turn, raised their own interest rates. For savers, that means that interest rates on certificates of deposit (CD) accounts often provide attractive returns.

Yet these returns can vary significantly based on the CD provider and the CD term, meaning the amount of time you agree to keep your money within a CD without paying a penalty typically. And, nearly all CDs — whether they're short-, mid- or long-term CDs, offer appealing rates at the moment. So, given all of today's choices, it begs the question: What CD term should you open right now?

Explore your top CD options online here.

Should you open short-, mid-, or long-term CDs?

"In general, the longer the CD term, the higher the CD rate offered," says David Johnston, CFP, managing partner at Amwell Ridge Wealth Management.

However, that's not the case right now. In the current environment, short-term CDs, such as 1-year CDs, often pay higher annual interest rates than long-term CDs, such as 5-year CDs. That typically happens because the current interest rate forecast expects that rates will start to drop in the coming years.

Yet long-term CDs can still hold advantages over shorter-term ones that pay higher interest rates, especially right now. By locking your money up for longer, you can potentially earn more interest over time if interest rates drop in the future.

"CDs are always a tradeoff between a guaranteed rate and the timing of when you may need those funds," says Chikako Tyler, EVP, chief financial officer at California Bank & Trust. "Before investing in a CD, it's important to determine how quickly you will need to access your funds."

But if you have some flexibility in terms of when you need access to your funds, you might be weighing whether a short-term, mid-term, or long-term CD is your best bet in terms of maximizing returns. While no one knows exactly what will happen in the future, considering the following possible pros and cons of different CD terms.

Find out how much you could earn with today's top CD rates.

Short-term CDs

A short-term CD typically has a maturity of one year or less. Investing in a short-term CD could be best for those who need access to their funds within this timeframe or for those who want to maximize short-term returns and then reevaluate their options when the CD matures.

"Short-term CDs can be a great way to increase your returns, without locking up funds you may need, either pre-planned or due to an unexpected need," says Tyler.

In a typical yield curve, short-term CDs typically pay lower interest rates than long-term CDs, but that's not the case right now. If you think interest rates will rise further, you might prefer to put money into a short-term CD so that you can then potentially reinvest at a higher rate when the CD matures. 

But if interest rates start to come down and long-term CDs offer higher interest rates again, then choosing a short-term CD could limit your overall returns.

"While no one has a crystal ball, forecasting interest rate trends can also factor into a CD decision. For instance, many economists feel today's interest rates are at or near their highs. Someone in this camp would typically prefer to lock in a longer-term CD with a higher rate," says Johnston.

Mid-term CDs 

A mid-term CD typically has a maturity of two to three years. As the name implies, mid-term CDs could be good for those seeking more of a middle ground.

"A mid-term CD can be a good solution if you are trying to balance higher returns with access to funds sooner," says Tyler.

CD rates for mid-term CDs are often higher than short-term CDs and lower than long-term CDs, but keep in mind that recently, this dynamic has generally been flipped.

But if interest rates fall, that could be an advantage to mid-term CD holders "because you would still be locked into your more attractive rate until the end of your term," says Aaron Cirksena, founder and CEO of MDRN Capital.

However, a mid-term CD locks your money up for longer, and you might prefer a longer-term guaranteed rate than what a mid-term CD provides. By the time your mid-term CD matures, it's possible rates will be lower than what you could have gotten for a few more years if you went with a long-term CD. 

Yet if rates rise, you might prefer to have your CD mature sooner.

Long-term CDs 

Long-term CDs typically have maturities of four to five years, and in some cases, more. 

"In a more normalized interest rate environment you would expect to get a higher yield for tying up your money for a longer period. In our current interest rate environment, with expectations that rates could go lower in the future, it is actually the opposite," says Cirksena.

But as with other CD terms, the lower CD interest rate forecast could be an incentive to take the guaranteed rate that long-term CDs provide now.

"Your benefit is getting to lock in a relatively high fixed interest rate for a longer period of time, during which interest rates in our economy may decrease and you would still be getting your higher rate," adds Cirksena.

Still, that comes with the drawback of less liquidity.

"It is also possible that interest rates move up after purchasing a long-term CD, which may result in buyer's remorse," says Tyler.

Consider what works with your finances

Ultimately, the choice between a short-term, mid-term and long-term CD depends on your financial situation.

"Overall, the way to determine which CD term is the best for you is to line up the maturity date with when you may need the money. For instance, if you were saving for a home purchase one year from now and would need access to your CD funds at that time, then you shouldn't lock those funds up in a 5-year CD," says Cirksena.

"On the other hand if you were using these funds for long-term savings and you were concerned about rates going down in the future, you may prefer to lock in a longer-term fixed CD rate," he adds.

Keep in mind that you don't necessarily have to choose just one type of CD. 

"Many times a blended approach can be most appropriate, such as using a CD ladder with different maturity dates" based on your liquidity needs, says Cirskena.

That can potentially spread out your risk in the sense that whether rates move up or down, you're not locked into just one CD term. As shorter-term CDs in a ladder mature, you can then reevaluate to see if you want to add more short-term, mid-term or long-term CDs.