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What is cost of deposit index?
The cost of deposit index, or CODI, is the average of the latest yields in CDs in a 12-month period, for CDs that have been traded on a national level for three consecutive months.
The CODI is one of several ways to set the changing interest rates on adjustable-rate mortgages, or ARMs, in conjunction with Treasury bills, prime rates, and the London Interbank Offered Rate, or LIBOR. This index is calculated using the average of the last 12 monthly average yields of CDs that have been traded for at least three consecutive months, based on the reports of the Federal Reserve Board.
There are two factors that affect the CODI. The first is that banks drag their feet when it comes to increasing the rates of CDs, and the second is the duration of the 12-month moving average. During times of rising rates, lenders see an opportunity to market the CODI because of the attractive pricing index, which helps them extend credit by using the adjustable-rate loans.
Cost of deposit index example
When you have opted for an adjustable-rate mortgage, one of the bases for setting the interest rates for your ARM is the CODI.
Your ARM could be tied to the CODI. CDs have varying maturities, but the six-month CD is the most popular among them. In order to get the interest rate, you will need to add the index and the margin. Let’s say the CODI is at 6.25 percent and the margin is at 2.25 percent. In that case, your loan’s interest rate should be:
6.25 percent + 2.25 percent = 8.5 percent
The index helps regulate the movements of interest rates, especially during times of frequent rate shifts. The CODI becomes ideal when interest rates are low. However, since it is expected to rise, the index generally delays the movement in market interest rates.