Understanding the 11th District Cost of Funds Index (COFI) and Its Impact on Mortgages

For many individuals, the world of mortgages can seem complex and daunting. From fixed-rate mortgages to adjustable-rate mortgages (ARM), there are various options to consider when securing a loan for a home.

Among these options lies the 11th District Cost of Funds Index (COFI), a vital component in determining the interest rates for ARMs in the western United States.

Let’s delve into what exactly the 11th District COFI is, how it works, and why it matters.

What Is the 11th District COFI?

The 11th District COFI isn't just another obscure financial term; it's a significant metric that affects the interest rates on mortgages, particularly in the western United States.

COFI represents the average interest rates paid on checking and savings accounts by financial institutions in Arizona, California, and Nevada. It's calculated monthly by the Federal Home Loan Bank of San Francisco, providing insight into the cost of funds for savings institutions in the Western region.

How Does It Work?

Published on the final day of each month, the COFI reflects the cost of funds for savings institutions within the Federal Home Loan Bank of San Francisco. This self-regulatory agency sets criteria for membership in the index.

The computation of COFI involves multiple factors, with interest payments on savings accounts holding the greatest weight. Consequently, the index tends to change slowly in response to market interest rate shifts, making it a lagging indicator.

Why Does COFI Matter for Mortgages?

Now, you might wonder, "Why should I care about COFI if I'm not a banker?" Well, if you're in the market for a mortgage, especially an ARM, understanding COFI is crucial.

ARM mortgages feature interest rates that adjust periodically, typically tied to an index like COFI. This means that when COFI changes, your mortgage rate could change, too.

However, it's important to note that your mortgage rate won't precisely mirror COFI. Lenders usually set ARM rates to be higher than COFI by a certain margin, depending on factors like credit history, loan size and term, negotiation terms, and many others.

COFI vs. Other Indices

While COFI reigns supreme in the western U.S., other regions have their preferred indices. For instance, in the eastern U.S., the 1-year Treasury index holds more sway. This regional distinction underscores the importance of understanding which index impacts your mortgage if you're considering an ARM.

Recent Trends

As of March 2018, the COFI stood at 0.814%, slightly down from the previous month. While this might seem like a small change, it could have implications for mortgage borrowers in the western states. Even slight fluctuations in COFI can influence the interest rates on ARMs, potentially affecting borrowers' monthly payments.

Conclusion

In conclusion, the 11th District Cost of Funds Index isn't just another obscure financial term. It's a vital metric that impacts the interest rates on adjustable-rate mortgages, particularly in the Western United States.

Understanding how COFI works and its implications for mortgage rates can empower borrowers to make informed decisions when navigating the complex world of home financing. So, the next time you hear about COFI, you'll know exactly why it matters.