The financial landscape is filled with various indices that serve as benchmarks for loan interest rates, and one of the most notable among these is the 11th District Cost of Funds Index (COFI). For those considering an adjustable-rate mortgage (ARM), or simply looking to understand how mortgage rates work in the western United States, knowing what COFI is and how it functions can provide valuable insights.
What is COFI?
The 11th District Cost of Funds Index is a monthly index that reflects the average interest rates paid by financial institutions on checking and savings accounts in Arizona, California, and Nevada. Established in 1981, COFI is widely used by mortgage lenders to adjust interest rates on ARMs, making it a critical tool in the mortgage market. Its purpose is to offer a comparable look at the costs involved in securing funds for lending.
COFI is published on the last day of each month and is derived from data submitted by savings institutions that are members of the Federal Home Loan Bank of San Francisco. These institutions must meet specific criteria set forth by the Bank, ensuring a reliable and consistent source of data for calculating the index.
The Calculation of COFI
The calculation of the 11th District COFI takes various factors into account, though it is primarily weighted towards the interest rates paid on savings accounts. This emphasis gives COFI a certain level of stability, resulting in what can be generally described as a slower response to rapid changes in the market. Consequently, COFI is seen as a two-month lagging indicator regarding current market interest rates.
For ARM loans, borrowers must note that the interest rate will not necessarily match the COFI. Typically, the ARM rate can be 2% to 3% higher than the COFI. This difference can depend on several factors:
- Borrower's Credit History: Those with a stronger credit profile may secure better terms.
- Size and Terms of the Loan: Larger loans may have different rates due to perceived risk.
- Negotiation: A borrower’s ability to negotiate with the lender can impact the final rate.
Geographic Influence
Given that COFI is based on data collected exclusively from three western states, its use is primarily focused on the western region of the United States. In contrast, lenders in the eastern U.S. typically refer to the 1-year Treasury index as their benchmark for ARMs. This geographic influence means that understanding regional economic conditions is crucial for interpreting COFI's relevance.
Historical Context and Current Trends
Historically, COFI has demonstrated an overall trend of low volatility, partially because it averages rates from multiple institutions in a diverse economic landscape. The index reflects broader economic conditions and changes in consumer savings behavior, which impacts financial institutions in those states. For example, if interest rates fall nationally, it might take a couple of months for COFI to reflect that stabilization.
As of recent reports, including the announcement from April 30, 2018, the COFI for March 2018 was reported at 0.814%, showing a slight decrease from February. Monitoring these kinds of fluctuations can be critical for consumers deciding between fixed-rate mortgages and ARMs, especially those considering taking out loans in the future.
Impact on Borrowers
Understanding the 11th District COFI can direct borrowers in their decision-making process. For instance, an ARM linked to COFI may be an appealing option if market conditions predict stable or declining interest rates. Conversely, if rates are projected to rise, locking in a fixed-rate mortgage might be wiser.
In conclusion, the 11th District Cost of Funds Index is a key metric for understanding adjustable-rate mortgages in the western United States. Its reliance on historical savings trends and its slow response to market changes make it a unique and useful index for both lenders and borrowers alike. Understanding COFI is crucial for making informed financial decisions in today’s ever-changing economic environment.