Cost of Funds Index (COFI)
What Is the Cost of Funds Index (COFI)?
The Cost of Funds Index (COFI) is an interest rate index that reflects the average interest expenses of financial institutions, especially savings institutions, on the funds they use to make loans. It has historically been used as a benchmark for some adjustable-rate mortgages (ARMs).
Because COFI is based on the cost banks pay for deposits and borrowed funds, it tends to move more gradually than some market-based indexes.
Why It Matters
COFI matters because it affects how interest rates are calculated on certain adjustable-rate loans. Borrowers with COFI-based mortgages may see their payments change as the index changes over time.
Understanding COFI helps borrowers evaluate how their mortgage rate may adjust and whether a loan tied to this index fits their financial needs.
How the Cost of Funds Index Works
COFI is calculated using the average interest costs financial institutions pay on deposits and borrowed funds.
A COFI-based adjustable-rate mortgage generally works like this:
- lender uses COFI as the benchmark
- a margin is added to the index
- the total becomes the borrower’s adjustable interest rate
- monthly payments may rise or fall as the index changes
Because COFI is based on institutional funding costs, it may respond more slowly to broader interest rate changes than some other indexes.
Example
A borrower has an adjustable-rate mortgage tied to COFI plus a 2% margin. If COFI is 1.5%, the mortgage rate becomes 3.5%, subject to the loan’s caps and terms.
COFI vs SOFR
- COFI is based on the average cost of funds at savings institutions.
- SOFR is based on transactions in the Treasury repurchase market.
FAQs About the Cost of Funds Index
Is COFI still widely used?
It is less common today than newer benchmark rates, but some older mortgages still use it.
Why does COFI move slowly?
Because it reflects average institutional funding costs rather than fast-moving market trades.
Does COFI directly set a mortgage rate?
No. Lenders usually add a margin to the index.
Related Terms
