The cost of funds index is traditionally used to determine interest rates on what type of loans?

The cost of funds index is primarily utilized to determine interest rates on adjustable rate mortgage (ARM) programs. This index reflects the cost of obtaining funds for lenders in the financial markets and serves as a benchmark for adjusting the interest rates on ARMs. When the index fluctuates, it indicates changes in the financial environment that impact the costs associated with borrowing, and thus, it directly influences the interest rates charged to borrowers with adjustable rate loans.

Borrowers benefit from this system since their interest rates can potentially decrease when the cost of funds index lowers, making their loan costs more favorable. In contrast, fixed-rate programs, home equity lines of credit, and reverse mortgages do not typically base their interest rates on this kind of index. Fixed-rate loans maintain a consistent interest rate for the duration of the loan, while home equity lines of credit and reverse mortgages follow different mechanisms for determining rates, relying more on the prime rate or established margins rather than a cost of funds index.