Cost of Savings Index (COSI): Meaning, Pros and Cons, FAQs

What Is the Cost of Savings Index (COSI)?

The Cost of Savings Index (COSI) is a popular index used for calculating the interest rate of certain adjustable-rate mortgages (ARMs). Officially known as the Wells Fargo Cost of Savings Index, it is based on the interest rates that Wells Fargo Bank pays to individuals on certificates of deposit (CDs).

Like other ARMs, COSI-linked loans transfer part of the risk from the lender to the borrower. While the introductory rates are more favorable than the terms for fixed-rate loans, changing interest rates can mean that some customers may end up paying more money than they would have paid otherwise. In some cases, they may even end up going deeper into debt.

Understanding the COSI

The COSI is considered to be among the most stable ARM indexes in the industry. Historically, it is less volatile than other popular benchmarks, such as the one-month London Interbank Offered Rate (LIBOR) index. As CD interest rates move more slowly than market interest rates in general, the COSI also tends to lag behind other mortgage indexes when it comes to adjusting to changes in interest rates. 

The COSI is calculated every month and used to determine the interest rate on ARMs. The interest rate that mortgage holders have to pay is the sum of the index value plus an additional amount called the ARM margin.

Pros and Cons of COSI-Indexed Mortgages

Loans with a COSI-linked interest rate may offer enticing flexibility and payment options compared to other mortgages. ARMs can be significantly cheaper than fixed-rate mortgages, at least during the first few years, when the introductory rates are low. Many COSI-indexed ARMs have minimum payment change caps—which limit the amount that the monthly payment can increase—as well as lifetime interest rate caps.

Since the COSI is steadier than other indexes, ARMs tied to this index benefit mortgage holders when rates are rising. They’re less advantageous when rates are falling.

On the downside, COSI-indexed mortgages tend not to offer periodic interest rate caps, which limit how much the interest rate can rise at one time. This creates the possibility for negative amortization: If the interest rates rise to the point that the monthly mortgage payment doesn't cover the interest due, any unpaid interest will get added to the loan balance, so the overall amount due on the mortgage increases.

Wells COSI Rates

The Wells COSI is based on the interest rate that Wells Fargo pays on CDs, also known as personal time deposits. The index is calculated using the weighted average of all of the interest rates paid on CDs as of the last business day of each month. The company announces each month’s COSI on the last business day prior to the 15th day of the following calendar month.

The index value is expressed as a percentage. In November 2009, when Wells Fargo assumed control of the index, the COSI stood at 2.40%. The rate trended downward for the better part of a decade, then moved up to 1.75% in mid-2019 before turning lower again. In October 2021, the Wells COSI was 0.18%, reflecting the impact of the series of interest rate cuts undertaken by the Federal Reserve to get the economy moving amid the pandemic. However, in 2022 and 2023, the central bank began raising interest rates to counteract inflation, which pushed the index higher. As of June 2024, the index stood at 4.55%.

The Bottom Line

One popular index used to calculate the interest rates on some ARMs is known as the COSI. Since 2009, Wells Fargo has compiled the COSI each month based on the interest rates paid on the bank’s CDs. It's considered one of the most stable ARM indexes in the industry—an advantage when interest rates are climbing but a drawback when they are falling. Many COSI-indexed ARMs have minimum payment change caps and lifetime interest rate caps—but they may not offer periodic interest rate caps.