Embracing the Power of the 11th District Cost of Funds Index (COFI)
The 11th District Cost of Funds Index (COFI) is a powerful financial metric representing a monthly weighted average of the interest rates paid on checking and savings accounts offered by banks in the western states of Arizona, California, and Nevada. Launched in 1981, COFI is a crucial indicator used by mortgage lenders to adjust the interest rates on adjustable-rate mortgages (ARMs). These rates fluctuate based on a chosen standard interest rate, making COFI one of the most popular indices among western U.S. lenders.
Published on the last day of each month, COFI reflects the cost of funds for western savings institutions associated with the Federal Home Loan Bank of San Francisco. Eligible institutions meet specific criteria set by this self-regulatory agency for inclusion in the index.
How the 11th District COFI Works
The COFI is carefully calculated using multiple factors, primarily the interest paid on savings accounts, which have the largest weight in the average. This methodology results in low volatility, meaning COFI adjusts slowly to market interest rate changes and generally provides a two-month lagging indicator for market rates.
An ARM’s interest rate does not directly equal COFI. Normally, the ARM rate sits approximately 2% to 3% above COFI, influenced by factors such as the borrower’s credit history, loan size and terms, and the effectiveness of the borrower’s negotiations with the bank.
Due to its regional relevancy, COFI is predominantly utilized in the western U.S., while the 1-year Treasury index is more common in the eastern states. For example, the Federal Home Loan Bank of San Francisco reported the COFI for March 2018 as being 0.814%, down from February.
Related Terms: adjustable-rate mortgage (ARM), cost of funds, Federal Home Loan Bank, interest rates, savings accounts.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is the 11th District Cost of Funds Index (COFI) primarily used for?
- [ ] To track consumer spending trends
- [x] As a benchmark index for adjustable-rate mortgages
- [ ] To measure stock market performance
- [ ] To compare corporate bond yields
## Which institution calculates and publishes the 11th District Cost of Funds Index (COFI)?
- [x] Federal Home Loan Bank of San Francisco
- [ ] Federal Reserve Bank
- [ ] U.S. Department of Treasury
- [ ] New York Stock Exchange
## Which of the following best describes the 11th District Cost of Funds Index (COFI)?
- [x] An expense-weighted average of the cost of funds for member banks in the 11th Federal Home Loan Bank District
- [ ] A simple average of interest rates of top savings accounts in the 11th Federal Home Loan Bank District
- [ ] A yearly average of all types of mortgage interest rates
- [ ] A quarterly measure of inflation in the 11th Federal Home Loan Bank District
## The 11th District Cost of Funds Index (COFI) is updated how frequently?
- [ ] Daily
- [ ] Weekly
- [x] Monthly
- [ ] Annually
## Which type of mortgage is most likely to be influenced by changes in the 11th District Cost of Funds Index (COFI)?
- [ ] Fixed-rate mortgage
- [ ] Interest-only mortgage
- [x] Adjustable-rate mortgage (ARM)
- [ ] Reverse mortgage
## What geographic area does the 11th District Cost of Funds Index (COFI) cover?
- [ ] The entire United States
- [ ] The East Coast
- [ ] The Midwest
- [x] A specific region including Arizona, California, and Nevada
## Which of the following directly impacts the value of the 11th District Cost of Funds Index (COFI)?
- [ ] Stock market performance
- [x] Changes in interest rates paid by financial institutions for funds
- [ ] Housing prices
- [ ] Gross Domestic Product (GDP)
## How might an increase in the 11th District Cost of Funds Index (COFI) affect borrowers with adjustable-rate mortgages?
- [ ] It would lower their interest rates
- [x] It would increase their monthly payments
- [ ] No effect as the rate is fixed
- [ ] It would lead to loan forgiveness
## Which economic participants are most affected by changes in the 11th District Cost of Funds Index (COFI)?
- [ ] Stock traders
- [ ] Bond investors
- [x] Mortgage borrowers with ARMs
- [ ] Venture capitalists
## When considering an adjustable-rate mortgage using COFI, why might a borrower be concerned about future trends?
- [ ] COFI always decreases over time
- [ ] COFI does not fluctuate
- [ ] COFI healthily correlates to stock indices
- [x] COFI fluctuations can lead to unpredictable borrowing costs
