2 ways interest rates have shifted this year

In many cases, interest rates have sunk to the bottom and stayed there for so long you could assume they are more or less dead in the water. However, subtle changes in the relationship between interest rates of differing length have taken place during the first eleven months of 2013, and in a low rate environment, even subtle changes take on added significance.

Here are two examples of how interest rate dynamics changed during 2013, and what they mean for consumers.

Long vs. short CD rates

From the beginning of the year through late November, the national average for one-year CD rates fell from 0.23 percent to 0.20 percent, according to figures from the FDIC. Over the same time period, the national average for 5-year CD rates fell from 0.84 percent to 0.75 percent.

It is normal for long-term CDs to offer the best CD rates, but because long-term rates fell more sharply than short-term rates, this advantage narrowed from 61 basis points to 55. Does that diminished advantage mean that depositors should shy away from longer-term CD rates, especially given the risk of locking into historically low rates? Not necessarily.

The X-factor to consider here is the penalty for early withdrawal. Since these penalties are often based on a specified number of months worth of interest, when interest rates are low, those penalties are also diminished.

So, suppose you are looking for a one-year CD. On average, you could expect to get a 0.20 percent interest rate. As an alternative, you could choose a five-year CD at 0.75 percent. Suppose that five-year CD had a penalty equivalent to six months worth of interest, and after a year you decide that CD rates had risen enough to justify paying that penalty to get out of the CD.

You would net about 0.37 percent in interest -- better than you would have done in the one-year CD. In fact, as long as the penalty is eight months of interest or less, at a rate differential of 0.75 percent to 0.20 percent, you would be better off after a year taking the long-term CD and paying the penalty.

The lesson here is that in addition to shopping for the best CD rates, you should also pay close attention to those early withdrawal penalties.

Long vs. short mortgage rates

In contrast to the dynamics of CDs, current mortgage rates show the spread between long-term and short-term rates has widened. The spread between 30-year and 15-year mortgage rates is now just shy of 1 percent, after starting the year at 70 basis points.

This makes a shorter mortgage a tempting proposition -- if you can swing those higher monthly payments. However, the same logic does not apply to adjustable-rate mortgages. Even though the spread between fixed and adjustable-rate mortgages has also widened, this is not enough to compensate for the risk of having a variable rate in what is shaping up as a rising-rate environment.