What Is a Cost of Funds Index?

What Is a Cost of Funds Index?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Cost of Funds Index (COFI) is a benchmark interest rate used by lenders to set adjustable-rate mortgages and other loans. It’s primarily used on the U.S West Coast and is calculated using the weighted average interest expenses of the financial institutions’ outstanding monthly liabilities. Coming from the 11th District Federal Home Loan Bank (FHLB) of San Francisco, a COFI helps determine what a borrower will pay in interest over the life of their loan. The value of COFI lasts for a month and changes based on the economic climate.

Related Questions

1. How is COFI calculated?

COFI is calculated based on the average interest paid by the 11th Federal Home Loan Bank District members on their sources of funds. It includes the cost of funds tied to savings accounts, advances from the FHLB, and other borrowings.

2. What are the benefits of a COFI-indexed ARM?

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A COFI-indexed ARM is usually less volatile compared to other mortgage options because changes in COFI are slower. This minimizes the economic impact on borrowers. Its interest rate adjustments are often limited to 7.5 percent every five years, offering protection for the consumers.

3. How does COFI affect mortgage payments?

When COFI increases, the lender raises the interest rate on the adjustable-rate mortgage, leading to higher monthly payments. Conversely, when COFI decreases, monthly mortgage payments can drop as well.

4. Is COFI the only rate index used for ARMs?

No, there are several rate indexes used for ARMs such as the LIBOR, Prime Rate, Treasury Bill (T-Bill), and others. Each index has its own characteristics, and the choice depends on the lender’s and borrower’s preference.

5. Can the COFI be influenced by governmental policies?

Yes, the COFI can be influenced by governmental policies such as those affecting inflation and monetary policy. Policies that increase or decrease overall interest rates can cause the COFI to rise or fall.