Definition
The Cost of Funds Index (COFI) is an economic indicator that reflects the average interest expense incurred by savings institutions to acquire funds. It is determined monthly and predominantly used as a benchmark for adjusting interest rates on Adjustable-Rate Mortgages (ARMs). The index represents the weighted monthly average of the cost of savings institutions in the Federal Home Loan Bank’s 11th District, serving California, Arizona, and Nevada.
Examples
- Adjustable-Rate Mortgages (ARMs): A homeowner with an ARM tied to the COFI index may have their mortgage rate adjusted annually based on the latest COFI value.
- Refinancing Loans: Borrowers may leverage COFI rates to assess the credibility of refinancing their current loans.
- Financial Instrument Pricing: Lenders might set interest rates for various loans based on COFI to stay competitive and align with market conditions.
Frequently Asked Questions
What is the significance of COFI in real estate markets?
COFI plays a crucial role in real estate markets as it directly influences the interest rates on ARMs. Understanding COFI’s movement helps stakeholders anticipate changes in borrowing costs.
How often is the COFI updated?
The Cost of Funds Index is updated monthly by the Federal Home Loan Bank of San Francisco.
How does COFI impact adjustable-rate mortgages?
COFI impacts the interest rate adjustments on adjustable-rate mortgages. When COFI increases, mortgage payments may also increase, and vice versa.
Is COFI a good indicator for predicting future interest rates?
While COFI provides insights into the existing cost environment of savings institutions, it should be supplemented with other economic indicators to predict future interest rates effectively.
How does COFI compare to other benchmark indexes?
COFI is generally more stable and less volatile compared to other benchmarks like the London Interbank Offered Rate (LIBOR) and Prime Rate, as it relies on the cost of funds from savings institutions.
Related Terms
- Adjustable-Rate Mortgages (ARMs): A type of mortgage where the interest rate applied on the outstanding balance varies throughout the life of the loan.
- LIBOR (London Interbank Offered Rate): A benchmark interest rate at which major global banks lend to one another.
- Prime Rate: The interest rate commercial banks charge their most creditworthy customers.
- Federal Home Loan Bank: A government-sponsored bank that provides reliable liquidity to member institutions to support housing finance and community investment.
Online Resources
- Federal Home Loan Bank of San Francisco: Official Website
- Mortgage News Daily: Mortgage News and COFI rates
- Investopedia COFI Explanation: Investopedia Article
References
- Federal Home Loan Bank of San Francisco. (n.d.). “Cost of Funds Index (COFI).”
- Mortgage News Daily. (n.d.). “COFI (Cost of Funds Index) and Adjustable-Rate Mortgages.”
Suggested Books for Further Studies
- “Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques” by Frank J. Fabozzi
- “The Real Estate Wholesaling Bible” by Than Merrill
- “Investing in Real Estate” by Gary W. Eldred, PhD
Quizzes
Real Estate Basics: COFI (Cost of Funds Index) Fundamentals Quiz
### What does the COFI index reflect?
- [ ] Home prices in specific regions.
- [x] Average interest expense of savings institutions in the 11th District.
- [ ] The value of the housing market.
- [ ] Employment rates within the real estate sector.
> **Explanation:** COFI represents the average interest expense of savings institutions located in the Western 11th Federal Reserve District.
### How frequently is the COFI index updated?
- [x] Monthly
- [ ] Quarterly
- [ ] Annually
- [ ] Weekly
> **Explanation:** The COFI is updated on a monthly basis, reflecting the average cost of funds for the preceding month.
### COFI predominantly affects which type of mortgage?
- [ ] Fixed-rate mortgages
- [x] Adjustable-rate mortgages
- [ ] Balloon payment mortgages
- [ ] Interest-only mortgages
> **Explanation:** COFI is commonly used as a benchmark for adjusting interest rates on adjustable-rate mortgages (ARMs).
### Which regions does the COFI index cover?
- [ ] New York, Florida, and Texas
- [ ] Illinois, Ohio, and Michigan
- [x] California, Arizona, and Nevada
- [ ] Washington, Oregon, and Idaho
> **Explanation:** The COFI index reflects the cost data from savings institutions in the 11th District, including California, Arizona, and Nevada.
### How is COFI generally characterized compared to other indices like LIBOR?
- [x] More stable and less volatile
- [ ] More volatile
- [ ] Of equal volatility
- [ ] Specific to mortgage-backed securities
> **Explanation:** COFI is known to be more stable and less volatile due to its basis on savings institutions' actual costs rather than market rates like LIBOR.
### Why is COFI significant for borrowers?
- [x] It affects their adjustable-rate mortgage payments.
- [ ] It determines property buying potential.
- [ ] It affects the value of their properties.
- [ ] It dictates the building permits issued in the 11th District.
> **Explanation:** For borrowers with adjustable-rate mortgages, COFI determines the changes to their interest rates and monthly payments.
### What does a high COFI value indicate?
- [x] Higher borrowing costs for savings institutions.
- [ ] Lower borrowing costs for savings institutions.
- [ ] Improved economic conditions.
- [ ] Increased home purchase rates.
> **Explanation:** A higher COFI value signifies that the cost for savings institutions to acquire funds has increased, typically leading to higher interest rates for borrowers.
### Which organization's banks contribute to the COFI calculation?
- [x] Federal Home Loan Bank of San Francisco
- [ ] Federal Reserve Bank of New York
- [ ] Federal Deposit Insurance Corporation (FDIC)
- [ ] National Association of Home Builders (NAHB)
> **Explanation:** The Federal Home Loan Bank of San Francisco facilitates the gathering of cost data from savings institutions in the 11th District to calculate COFI.
### In which kind of economic conditions would a borrower consider different indexes over COFI?
- [ ] During economic stability
- [x] During volatile interest rate periods
- [ ] During tax season
- [ ] During high employment rates
> **Explanation:** Borrowers may seek indexes different from COFI in times of market volatility, as some other indexes might be more responsive to market changes.
### What does the stability of COFI ensure for mortgage holders?
- [x] Predictability in interest payments.
- [ ] Higher interest rates continually.
- [ ] Increased principal payments.
- [ ] Fixed monthly mortgage payments.
> **Explanation:** The stability of COFI generally ensures predictability and less frequent extreme changes in interest payments for mortgage holders.
