QandAs: Loans

What is the Cost of Savings Index?

Answer:
The Cost of Savings Index (COSI) is a popular

index that determines the interest adjustment on certain adjustable rate mortgages. Adjustable rate mortgages are unlike fixed rate home loans.

These loans have rates that can rise or fall according to an index. In turn, borrowers who choose this type of home loan experience varying mortgage payment amounts. Although the Cost of Savings Index is very stable, adjustments do occur monthly.

This particular index receives funds from World Savings, who receives its funds from deposits made by consumers. The interests from these deposits are used for mortgages and other loans.

The interest rate of these deposits on the last day of the month determines the Cost of Savings Index. This index is commonly used on option ARM loans, and it has several distinct features.

For starters, the Cost of Savings Index includes minimum payment change caps. With each adjustment, a borrower’s minimum payment will not increase more than 7.5%.

Additionally, this index has a lifetime interest rate cap of 12%. Unfortunately, there isn’t a periodic interest rate cap on the COSI. Therefore, negative amortization can occur on some adjustable rate loans. Negative amortization results when interest payments are less than the interest due. In turn, the original loan balance increases.


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