What type of loans traditionally uses the cost of funds index to determine interest rates?

The cost of funds index is primarily associated with adjustable-rate mortgage products. These loans have interest rates that can fluctuate over time based on changes in underlying financial metrics, such as indices that reflect the cost of obtaining funds. When a loan is structured to be adjustable, the interest rate is recalculated based on a predetermined index, often the cost of funds index, which reflects the ongoing costs of borrowing.

This mechanism allows lenders to adjust the interest rates periodically to align with prevailing market conditions, which can lead to reduced interest payments for borrowers when market rates decrease, although it can also lead to increased payments if rates rise. This dynamic structure makes adjustable-rate programs distinct from fixed-rate loans, where the interest remains constant throughout the life of the loan.

Home equity lines of credit and reverse mortgages may involve different types of indexing or structures. Meanwhile, 15 and 30-year fixed-rate mortgages are intended to provide stability and predictability in payments, making them less tied to fluctuating indices like the cost of funds index. Hence, the classification of adjustments on adjustable-rate programs as relying on the cost of funds index is the appropriate context for understanding this financial concept.