With the rates of long term CDs so low compared with shorter term CDs, is laddering worth it? MyMoneyBlog looks into this using ING Direct as an example. In the example, a ladder is started with $1K in the savings account, and $1K in 4 CDs with terms of 1 to 4 years. The average rate of all 5 of these comes out to 4.29%.
If this same ladder approach is applied at other banks, which bank would have the highest average rate? I've repeated this calculation for several banks that I track in my weekly summaries. The rates are based on averaging the savings account rate with the 1-year, 2-year, 3-year and 4-year CD rates. The results are listed below:
- 4.52% GMAC Bank (3.75%, 4.60%, 4.70%, 4.75%, 4.80%) ($500 min)
- 4.46% Corus Bank (3.92%, 4.60% x 4) ($10K min)
- 4.46% UmbrellaBank (4.00%, 4.50%, 4.55%, 4.60%, 4.65%) ($1K min)
- 4.39% Virtualbank (3.55%, 4.60% x 4) ($10K min)
- 4.38% Netbank (3.20%, 4.45%, 4.70%, 4.75%, 4.80%) ($1K min)
- 4.29% ING Direct (3.40%, 4.20%, 4.50%, 4.65%, 4.70%)
- 4.27% MetLife Bank (3.50%, 4.41%, 4.45%, 4.50%, 4.50%) ($1K min)
Two of the banks have inverted yield curves (1 year CD rates are higher than the longer term CD rates). Virtualbank's 1 year CD is at 4.60% which is higher than the 2 and 3 year CDs and equivalent to the 4-year CD. Corus Bank's rates are even more inverted. Corus Bank's 1-year CD is at 4.60% which is almost 0.60% higher than the 4-year CD. For these two banks I've just used their 1-year CDs instead of the longer term CDs.
GMAC Bank has the highest average of 4.52%. If only the money market and 1-year CD were used, the average rate would be 4.43%. This is close to Corus Bank with only the money market account and 1-year CD.
So the best choice in my opinion is GMAC Bank with its money market account and 1-year CD. Even though this is 0.03% lower than Corus Bank, GMAC has only a $500 minimum deposit requirement and seems to have a better online funding capability.
The extra 0.09% by including GMAC's long term CDs doesn't seem to be a big enough gain for giving up the liquidity and the potential to earn more as interest rates rise. About 8 months ago, ING Direct's 5-year CDs were only earning 4.10% (0.10% less than ING's current 1-year CD). I think it's likely that we'll see similar increases in interest rates over the next year.