1-Year vs. 5-Year CD: The Term Premium Vanished, Then Came Back

When we first published this piece on September 19, 2026, a longer CD was paying almost nothing extra. The best 1-year CD paid 4.45% APY and the best 5-year CD paid 4.50%. Twelve days later, the picture had changed: on October 1, 2026, the best 1-year CD paid 4.50% and the best 5-year CD paid 4.95%. These are dated observations; use the live rate comparison below for current offers.

Here is what happened, and what it means for the term you choose.

Why a 5-year CD should pay more

A bank is asking for something when it sells you a 5-year CD instead of a 1-year one: your money, locked away, for years you might need it back. Normally that's worth a premium, called the term premium. In mid-September 2026 it nearly vanished. By October 1 it was back.

On September 19, Popular Direct paid the same 4.50% APY whether you locked for two years or five. On October 1, the same bank's 5-year CD led the market at 4.95%. These are the best advertised rates SwitchWize tracked on each date, often from different banks, so your own bank's numbers may look different. For today's numbers, the best 1-year CD is … and the best 5-year CD is ….

The Fed's rate path since 2022

In June 2022, inflation hit a 40-year peak of 9.1%. The Fed answered with eleven hikes in sixteen months, taking its target range from near zero to 5.25% to 5.50% by July 2023. Banks expected cuts within a year or two, so they had no reason to pay extra for locking savers in long. Through much of 2023 and 2024, the best 1-year CDs often paid more than 5-year CDs, an "inverted" curve, the opposite of normal.

Then the cutting started. The Fed cut on September 18, 2024, and twice more by December, landing at 4.25% to 4.50%. It paused through most of 2025, cut three more times in late 2025 to 3.50% to 3.75%, and held there at every 2026 meeting through July. On September 16, 2026, it raised rates for the first time since 2023, a quarter point to 3.75% to 4.00%.

Why the curve went flat, then steepened

Right around that hike, the curve was nearly flat. A bank prices a CD partly on where it expects rates to head, and after two years of cuts followed by a sudden hike, nobody had a confident answer. When a bank doesn't know which way rates go next, it has little reason to pay extra for a longer CD.

By October 1 the curve sloped upward again. The Fed's own September 2026 projections offer one plausible reading: the median official expects the funds rate at 4.1% at the end of 2026 and 2027, then 3.9% at the end of 2028 and lower after that. If banks expect rates to stay higher for a while and drift down later, a long CD that locks today's rate is worth more to savers, and banks competing for multi-year deposits pay up for it. That is an interpretation, not something any bank has told us, and the curve can flatten again as fast as it steepened.

Is a 45-basis-point premium worth it?

On $25,000, the October 1 gap is worth about $112.50 a year. At the September 19 gap it was about $12.50. So the case for a longer CD is much stronger than it was two weeks ago, but it still comes with a real cost: access.

Break a 5-year CD early and most banks charge a penalty worth several months to a year of interest, depending on the bank and the term. On $25,000 at 4.95%, a year of interest is about $1,240, roughly eleven years' worth of the premium over a 1-year CD. A penalty like that erases the advantage fast if you need the money in year two.

There is also rate risk in both directions:

• If rates rise further (the Fed's projections show one more hike in 2026), a 5-year CD leaves you stuck below newer offers.
• If rates fall later (the projections show a slow drift down by 2028), a 5-year CD protects you, and a 1-year CD has to be renewed at whatever rates are available then.

How to decide

Compare the term you want with the terms next to it, on the day you lock, not with a checking account paying near zero. Then match the term to when you will actually need the money.

• Money you are sure you won't touch for five years: a 5-year CD now pays a real premium. Confirm the early-withdrawal penalty first.
• Money you might need in one to three years: a shorter CD, or a high-yield savings account at 4.40% APY, keeps you flexible.
• Not sure: a CD ladder splits the money across terms, so part of it comes due each year while the rest earns longer-term rates.

Quick answers

Should I get a 1-year or 5-year CD right now? As of October 1, 2026, the best 5-year CD paid about 45 basis points more than the best 1-year CD, about $112 a year on $25,000. Take the longer term only for money you are confident you won't need.

Why did the gap change so fast? Banks reprice CDs often, and the Fed's September 16, 2026 hike left the outlook unsettled. The curve was flat right after the hike and had steepened again within two weeks.

What should I do instead of locking a long CD? Consider a CD ladder or a high-yield savings account, both of which let you react if rates move.

Methodology

CD rates cited here were checked against SwitchWize's tracked rate observations on 2026-09-19 and again on 2026-10-01, and reflect the best publicly advertised APY per term on each date; rates change and your own bank's offer may differ. Fed funds rate history and projections are drawn from Federal Reserve FOMC statements and the September 2026 Summary of Economic Projections. The description of the 2023 to 2024 inverted CD curve is a general summary of that period, not a figure from a single bank. Early-withdrawal-penalty ranges are described generally based on common industry practice, not one specific bank's terms; always confirm the penalty on your own CD's disclosure before locking. This is educational information, not personalized financial advice.