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What is a COFI mortgage?
A COFI mortgage is a type of mortgage on which interest is calculated based on the cost of funds index, or COFI. These mortgages have variable rates, like adjustable-rate mortgages (ARMs), as the index rate goes up or down each month. COFI mortgages are not as common as they used to be.
The COFI is a weighted average of what it costs banks to pay interest on savings accounts or on money borrowed from other financial institutions. Each month, the Federal Home Loan Bank of San Francisco receives interest rates from banks in its member system and publishes the average as the COFI. Although there are twelve such systems, the index published by FHL Bank of San Francisco is considered the benchmark.
The COFI is just one of several indexes that banks can use to determine interest rates on their mortgage products; COFI mortgages are those that specifically rely on that index to set rates. In order to make a profit, banks take the COFI rate and add a margin on top of that, which is a few more percentage points. Because the COFI rate changes every month, COFI mortgages are by definition variable, meaning that they’re commonly associated with adjustable-rate mortgages that allow the bank to periodically revise the interest rate upward or downward.
Interest rates on COFI mortgages have traditionally been a few percentage points lower than those derived from other indexes, and they’re even sometimes lower than those on fixed-rate mortgages. However, COFI rates have fallen so much in the last ten years that mortgages using the index to determine rates have increasingly disappeared. As of 2017, the COFI rate has averaged about 0.631 percent.
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COFI mortgage example
Nozomi has a 7/1 adjustable-rate mortgage tied to the COFI rate once the seven-year fixed-rate period has ended. The bank uses an “index + margin” calculation and her interest rate actually goes down a little in the first month of adjusted rates. For the following month, her interest rate goes up slightly as the COFI rate also increased by a few tenths of a percentage point.