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Image of Brady Bell - Bellhaven Blog Author

Written by: Brady Bell

Published Dec 4, 2024

"Doing my best to make real estate easy to understand for the average Joe."

3 min

6 sec read

Glossary Term

Mortgages Category Image
Mortgages Category Image
Mortgages Category Image
  1. 1.What is the Cost of Funds Index COFI and how does it affect mortgages?
    2.Definition and Basic Concepts
    3.How COFI Works in Practice
    4.COFI vs. Other Popular Mortgage Indexes
    5.Impact on Adjustable Rate Mortgages
    6.Historical Performance
    7.Advantages and Disadvantages of COFI-Based Mortgages
    8.Common Questions About COFI
    9.Future of COFI in Mortgage Lending
    10.Making Informed Mortgage Decisions
    11.Ready to Make Your Move?

What is the Cost of Funds Index COFI and how does it affect mortgages?

I love talking about mortgage rates and indexes because they play such a big role in home buying decisions. If you're looking into adjustable-rate mortgages (ARMs), you might have come across COFI - a unique index that's particularly popular in western states. Let me break this down for you in a way that makes sense.

Cost of Funds Index (COFI): The Cost of Funds Index (COFI) is a measure that tracks the average interest rate that banks in the Western United States pay for their borrowed money and customer deposits. This rate is commonly used to adjust interest rates on some adjustable-rate mortgages (ARMs), particularly in the western states.

Definition and Basic Concepts

COFI isn't just another random number - it's calculated based on real costs that banks face. Think of it as a reflection of what banks pay to get the money they lend to you. The index looks at two main things: how much banks pay to borrow money themselves, and what interest rates they're paying their customers on deposits.

What makes COFI special is its regional focus on the Western United States. This regional aspect makes it particularly relevant if you're house hunting in states like California, Oregon, or Washington.

How COFI Works in Practice

The calculation of COFI happens monthly, with various western banks reporting their costs. The Federal Home Loan Bank of San Francisco crunches these numbers and releases the index around the end of each month. This process creates a reliable snapshot of banking costs in the western region.

COFI vs. Other Popular Mortgage Indexes

You might be wondering how COFI stacks up against other indexes. Unlike LIBOR (which is being phased out) or the Prime Rate, COFI tends to move more slowly and steadily. This can be good news for your monthly payments, as they might not jump around as much as with other indexes.

Impact on Adjustable Rate Mortgages

If you have a COFI-based ARM, here's what you need to know about rate adjustments:

  • Your rate typically adjusts once every month or year

  • Your actual rate will be COFI plus a margin (set by your lender)

  • Rate caps still protect you from extreme changes

Historical Performance

Looking back, COFI has shown itself to be relatively stable compared to other indexes. This stability comes from its connection to actual bank costs rather than market speculation or federal policy decisions alone.

Advantages and Disadvantages of COFI-Based Mortgages

Benefits:

  • More stable than many other indexes

  • Strong regional connection in western states

  • Usually changes are gradual rather than sudden

Drawbacks:

  • Mainly useful in western states

  • Can be harder to understand than simpler indexes

  • Rate changes might lag behind market trends

Common Questions About COFI

How often do rates change?

COFI rates update monthly, but your mortgage might adjust less frequently depending on your terms.

What about monthly payments?

Your payments might change each time your rate adjusts, but the changes are often more gradual than with other indexes.

Should I refinance my COFI ARM?

This depends on your current rate, market conditions, and personal financial goals.

Future of COFI in Mortgage Lending

The mortgage market keeps changing, but COFI maintains its place as a reliable index, especially in the western United States. While new alternatives might emerge, COFI's stability and regional focus keep it relevant for many borrowers.

Making Informed Mortgage Decisions

Choosing between a COFI-based ARM and other mortgage options requires careful consideration of your financial situation and goals. I suggest working with experienced professionals who can help you evaluate all your options.

Ready to Make Your Move?

At Bellhaven Real Estate, we're here to help you navigate your mortgage options. Our team can explain how different indexes, including COFI, might affect your monthly payments and long-term financial plans. Let's find the right mortgage solution for your unique situation.

Related terms

Related terms

  1. 1.What is the Cost of Funds Index COFI and how does it affect mortgages?
    2.Definition and Basic Concepts
    3.How COFI Works in Practice
    4.COFI vs. Other Popular Mortgage Indexes
    5.Impact on Adjustable Rate Mortgages
    6.Historical Performance
    7.Advantages and Disadvantages of COFI-Based Mortgages
    8.Common Questions About COFI
    9.Future of COFI in Mortgage Lending
    10.Making Informed Mortgage Decisions
    11.Ready to Make Your Move?

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