What is the cost of funds index?
"The cost of funds index, or COFI, is the weighted average of interest rates that banks pay on savings accounts held by their customers and money borrowed from other institutions. In turn, this rate is used to calculate how much interest these banks charge on loans, like adjustable-rate mortgages (ARMs)."
Let's dive deeper:
When someone takes out a mortgage or a loan with their bank, the interest rate they pay is partly determined by the index rate the bank uses.
The three most common index rates are derived from...
One-year constant-maturity U.S. Treasury securities, the London Interbank Offered Rate (Libor), and the cost of funds index.
Think of the cost of funds as the cost of doing business.
The difference is that the business is holding and lending out money, and banks need to make money for the expense of holding funds and paying interest on them. They may use the COFI to determine what they should charge in interest to make up for the interest they pay out, adding a few percentage points on top that are called a margin. Although the COFI has increasingly fallen out of style, it is frequently used to determine the cost of variable-rate loans, such as ARMs. Since March 2014, the COFI rate has hovered around 0.6 to 0.7 percent.
We hope this helps you to understand the COFI a little bit more, and the real estate world in general! To read more, check out this great piece from Bankrate - Below is the article that goes more in depth about the cost of funds index and how it applies to you, and real estate!
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