Certificate Of Deposit Index - CODI Index

Buying a house? Well, then it'd probably never cross your mind to ask your lender which index they use to come up with your monthly mortgage rate. This would be an important question to ask, particularly if you are taking out an adjustable rate mortgage (ARM).

A Certificate of Deposit Index (CODI) is one of several index choices that banks have to set mortgage rates. It’s the 12-month average of the most recently published yields on nationally traded three-month certificates of deposit. Calculated around the first Monday of each month, the CODI is considered to be not as volatile as other mortgage indexes.

Banks also use the one, six, or twelve-month London Interbank Offered Rate (LIBOR) index, the prime lending rate, the one-year constant maturity treasury value, or the MTA index. Some types of adjustable rate mortgages offer you the choice of what index you want to use. Called a payment option ARM, it consists of two parts: the index value plus a margin. The margin amount is fixed by the lender for the life of the mortgage. If you choose an index because it's lower than other indexes, chances are the margin will be higher. So the formula to calculate the ARM rate is simply index + margin = interest rate.

Let’s say Henry decides to roll the dice and take out a payment option adjustable rate mortgage, as interest rates are currently low and he doesn’t plan to stay in the house beyond a few years. Henry won’t just compare the current ARM rates published by the banks; he asks each one which index they use and what their margin is.

He decides to go with the bank that uses a Certificate of Deposit Index, because it doesn’t change as much as other indexes, and takes longer to adjust when interest rates change.