What is the Cost of Funds Index (COFI)?
The Cost of Funds Index (COFI) is an index used to reflect the cost of funds for savings institutions in the United States, typically used to set interest rates on adjustable-rate mortgages (ARMs). The index is derived from the weighted average of the interest expense paid by savings and loan associations, credit unions, and other thrift institutions for the use of borrowed funds, as reported each month.
Examples
- Adjustable-Rate Mortgage (ARM): James opts for an adjustable-rate mortgage, which has its interest rate linked to the COFI. As of December 2020, the 11th District COFI is reported as 0.512%. This means that James’s mortgage interest rate will be determined based on this COFI benchmark plus a predefined margin.
- Loan Pricing: Sarah’s lending institution uses COFI to determine the interest rate for several of its loan products including savings loans. If the COFI increases or decreases, it directly impacts the interest rates Sarah will be charged.
Frequently Asked Questions (FAQs)
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How is the COFI calculated?
- The COFI is calculated by determining the weighted average of the interest expenses for thrift institutions on the West Coast, typically done monthly.
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Why do lenders use COFI?
- Lenders use COFI because it represents a reliable and objective measure of prevailing interest rates affecting the cost of funds, enabling them to price loans and mortgages appropriately.
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Is COFI applicable nationwide?
- While there are various COFI sub-indexes, the most commonly referenced is the 11th District COFI, which focuses on the Western United States. There may be regional variations.
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What impacts the COFI?
- COFI is impacted by the overall economic environment, Federal Reserve policies, and changes in the cost of borrowing for financial institutions.
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How frequently is COFI updated?
- COFI is typically updated monthly.
Related Terms with Definitions
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Adjustable-Rate Mortgage (ARM): A type of mortgage in which the interest rate varies based on a specific benchmark or index, such as COFI.
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Thrift Institutions: Financial institutions that primarily accept savings deposits and originated mortgage loans, including savings and loan associations, credit unions, and mutual savings banks.
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Weighted Average: A statistical measure that reflects the average of a set of values, each of which has a different degree of importance or frequency.
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Interest Rate Margin: The fixed percentage point added to an index rate, which determines the interest rate adjustment for an ARM.
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Benchmark Rate: A standard interest rate or index used to set terms for variable-rate financial products, such as mortgages and loans.
Online Resources
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Federal Reserve Bank of San Francisco - COFI Index: Comprehensive information and updates on the 11th District COFI can be found here.
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Investopedia: Cost of Funds Index (COFI)—Investopedia’s explanation of COFI, its applications, and impacts.
References
- Federal Home Loan Bank of San Francisco. (2020). Cost of Funds Index (COFI). Retrieved from https://www.fhlbsf.com
- Federal Reserve Bank of San Francisco. (n.d.). Economic Research - 11th District COFI. Retrieved from https://www.frbsf.org
Suggested Books for Further Studies
- “The Mortgage Encyclopedia” by Jack Guttentag: This book provides an extensive overview of mortgage terms, concepts, and calculations, including those related specifically to adjustable-rate mortgages.
- “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher: Revisits the principles of real estate finance, including pivotal indexes like COFI.
- “The Handbook of Mortgage-Backed Securities” by Frank J. Fabozzi: An in-depth examination of mortgage-backed securities, with a focus on interest rate determinations through indexes such as COFI.
