📊 What Is the Cost of Funds Index (COFI)?

The Cost of Funds Index (COFI) is a regional economic index that measures the average interest banks in the 11th Federal Home Loan Bank District pay to borrow funds. COFI was historically used to set interest rates for certain adjustable-rate mortgages (ARMs), particularly in Arizona, California, and Nevada. Although less common today, many older mortgages still reference COFI as their adjustment benchmark.

How the Cost of Funds Index (COFI) Works

COFI reflects the interest costs incurred by savings institutions as they acquire funds from depositors. When lenders use COFI to adjust ARM interest rates, they apply:

  • The COFI index value — released monthly.
  • Plus the loan’s margin — a fixed percentage added by the lender.
  • Subject to rate caps — limits on how much the rate can change.

Because COFI updates slowly and is based on banks’ long-term funding expenses, mortgages tied to COFI typically experience more gradual rate adjustments compared to indexes like LIBOR, SOFR, or the CMT.

Why COFI Matters in Real Estate

Key reasons COFI is important:

  • It historically provided more stable ARM adjustments than other indexes.
  • Borrowers with COFI-based ARMs may still have in rate changes.
  • Understanding COFI helps homeowners decode older loan documents and disclosures.
  • COFI-linked ARMs are still active in certain Western states.

Why COFI is less used today:

  • Many lenders phased out COFI ARMs after financial regulation changes.
  • Most new ARMs rely on indexes such as SOFR, CMT, or Prime.

Example of COFI in a Mortgage

Imagine a homeowner whose ARM rate is tied to COFI with the following terms:

  • Current COFI: 2.5%
  • Loan margin: 2%
  • Rate cap this period: 1%

The new interest rate would be:

COFI (2.5%) + Margin (2%) = 4.5%

If the borrower’s previous rate was 3.8%, the loan would increase only to 4.5%, assuming the cap allows it. This example shows how COFI-based ARMs generally move more slowly and steadily than those tied to faster-moving indexes.

Why COFI Matters for FSBO Sellers

While COFI is a specialized topic, FSBO sellers may encounter buyers with older COFI-based mortgages. Understanding COFI helps sellers:

  • Interpret buyer financing strength and ARM stability.
  • Evaluate offers from buyers refinancing or carrying COFI-based loans.
  • Understand how ARM adjustments may affect a buyer’s payment capacity.

Homeowners using Flat Fee MLS through Brokerless can better navigate buyer financing scenarios, including unusual mortgage index types.

🔗 Related Resources for Buyers & Sellers

Frequently Asked Questions

Is COFI still used today?
COFI is used far less often in new loan originations, but many older ARMs still rely on COFI for rate adjustments.

Why do some homeowners prefer COFI-based ARMs?
Because COFI typically adjusts slowly, resulting in smoother interest rate changes.

What index replaced COFI?
Many lenders transitioned to SOFR, CMT, or the Prime Rate.

Does COFI affect mortgage payments?
Yes. If your ARM is tied to COFI, changes to the index can affect your mortgage rate and monthly payment.

Can I refinance out of a COFI-based ARM?
Yes—refinancing into a fixed-rate loan or a loan tied to a modern index is common.

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