COFI is a ratio used by lenders and banks to calculate interest rates, based on interest expenses reported by financial institutions. It is used as the basis for interest rates on adjustable-rate mortgages and savings accounts, with a margin added to determine the rate.
The cost of funds index (COFI) is one of the ratios that lenders and banks use to calculate interest rates when the rate changes over time. When a bank uses this ratio for bank accounts, the bank typically calculates the interest it pays to account holders on accounts such as savings accounts. When a mortgage lender uses the COFI index, the lender uses the index as the basis for the interest rate the borrower will pay on an adjustable-rate mortgage each time the rate adjusts.
The COFI index is derived from interest expenses reported by banks, financial institutions, and mortgage lenders. There are specific banks and lenders that report the interest paid by each institution, including those in the states of Nevada, Arizona, and California. In addition, thrifts that are members of the Federal Home Loan Bank of San Francisco also report interest expense to calculate the Cost of Funds Ratio on a monthly basis.
The movement of the index is caused by several different factors. Some of the factors that are included in the calculation of the cost of funds ratio include market interest rates, the sources that reporting members have for obtaining money, mergers and acquisitions, and accounting rules for institutions. Generally, this index is in line with other indices such as the Prime, LIBOR or US Treasury Bill.
Since the cost of funds index is the base or base of the interest rate set by these various institutions, a margin is added to the index to determine the rate. For example, if the COFI is 2.75 percent and the spread is 2.5 percent, the interest rate the bank pays on a savings account or charges on a loan is 5.25 percent. When establishing an account where interest is paid or earned, the way the interest rate is calculated is an important factor.
The index is especially important when setting up variable rate loans. Most account holders can determine their rate by using the Cost of Funds Index and adding the margin that the lender adds.
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