Glossary term
Cost of Funds Index (COFI)
A cost of funds index is an interest-rate benchmark based on funding costs that was historically used to reset some adjustable-rate loans.
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What Is the Cost of Funds Index?
A cost of funds index, or COFI, is an interest-rate benchmark based on the funding costs of financial institutions. In consumer finance, the term most often refers to the 11th District Cost of Funds Index, which was historically used as an index for some adjustable-rate mortgages, especially in parts of the western United States.
COFI matters because an adjustable-rate loan's payment can change when its index changes. The borrower's adjusted rate is usually the index plus the loan's margin, subject to the caps and timing rules in the mortgage documents.
Key Takeaways
- A COFI is a benchmark tied to institutional funding costs.
- The 11th District COFI was historically used for some adjustable-rate mortgages.
- COFI-indexed ARMs adjust through the same basic index-plus-margin structure as other ARMs.
- The original 11th District COFI was discontinued, and Freddie Mac publishes replacement index information for affected products.
- Borrowers with older COFI-indexed loans should review their note and servicer notices to understand the replacement benchmark.
How COFI Affected Adjustable-Rate Loans
In an ARM, the index is the moving part of the interest-rate formula. The lender adds a fixed margin to that index to calculate the adjusted rate. If the index rises, the borrower's rate can rise at the next adjustment date, within the loan's caps. If the index falls, the rate may fall, again subject to the loan's terms.
COFI was known as a slower-moving benchmark because it reflected funding costs rather than instantly repricing with short-term market rates. That lag could make it behave differently from Treasury- or SOFR-based indexes.
COFI and Replacement Indexes
Item | Practical meaning |
|---|---|
Original COFI | Historical benchmark tied to funding costs at reporting institutions. |
ARM margin | The lender's fixed addition to the index. |
Replacement index | A substitute benchmark used when the original index is no longer published. |
Servicer notice | The document borrowers should review to understand how their loan will reset. |
What Borrowers Should Review
For most new borrowers, COFI is more historical than mainstream. For borrowers who still have an older COFI-indexed ARM, the important documents are the promissory note, ARM rider, adjustment notices, and any servicer communications about replacement index treatment. Those documents determine how the loan adjusts, not a generic definition of COFI.
Borrowers should focus on the fully adjusted payment, lifetime caps, and whether the replacement benchmark changes the expected rate path.
The Bottom Line
A cost of funds index is an interest-rate benchmark based on institutional funding costs. It is mainly relevant today for understanding older COFI-indexed adjustable-rate mortgages and how replacement indexes affect future rate adjustments.