What is a Certificate Of Deposit Index?
Certificate Of Deposit Index is the 12-month average of the most recently published dealer bid rates (yields) on nationally traded three-month certificates of deposit as reported in the H.15 Federal Reserve Statistical Release. The yields are annualized using a 360-day year. For purposes of determining CODI, "published" means first made available to the public by the Federal Reserve Board. The CODI index is calculated on or near the first Monday of each calendar month and is often used for setting adjustable rate mortgages.
Understanding a Certificate Of Deposit Index (CODI Index)
Because the CODI index is a 12-month moving average, it is not as volatile as some other popular mortgage indexes such as the one-month London Interbank Offered Rate (LIBOR) index. It tends to lag other mortgage indexes in the rate at which it adjusts when interest rates change.
Some mortgages, such as payment option ARMs, offer the borrower a choice of indexes. This choice should be made with some analysis. The interest rate on an adjustable-rate mortgage is known as the fully indexed interest rate - it equals the index value plus the margin. While the index is variable, the margin is fixed for the life of the mortgage. When considering which index is most economical, don't forget about the margin. The lower an index is relative to another index, the higher the margin is likely to be.
Some common mortgage indexes include: the prime lending rate, the one-year constant maturity treasury (CMT) value, the one-month, six-month and 12-month LIBORs, as well as the MTA index, which is a 12-month moving average of the one-year CMT index. To calculate your adjustable mortgage rate the formula is Index + Margin = Your Interest Rate.
The index that an adjustable-rate mortgage is tied to is an important factor in the choice of a mortgage. For example, if a borrower believes that interest rates are going to rise in the future, the MTA index would be a more economical choice than the one-month LIBOR index because the moving average calculation of the MTA index creates a lag effect.
The lender chooses which rate your mortgage is tied to, but you have a choice of lenders and by all means should consider the rate that each lender uses. A few lenders even use their own cost of funds as an index, rather than using other indexes. It's wise to ask the lender where this rate is published and how it is calculated so you can compare its movement to other common indexes.