Anonymous
Posted on: 07th Apr, 2004 02:42 am
The term COFI or Cost of Funds Index is the weighted average interest rate paid to the depositors each month by the financial institutions residing in the 11 th federal Home Loan Bank District. It is also known as 11 th District Monthly Weighted Average Cost of Fund Index.
Benefits:
The deposits in the 11 th Federal Home Loan Bank District are a mix of demand deposits, long term certificate of deposits and borrowings. With a hike in the money market interest rates, the rates of demand deposits also go up. But until the old certificate of deposits start rolling, COFI as a whole cannot go high. So the movement of COFI is quite slow.
Disadvantages:
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Benefits:
The deposits in the 11 th Federal Home Loan Bank District are a mix of demand deposits, long term certificate of deposits and borrowings. With a hike in the money market interest rates, the rates of demand deposits also go up. But until the old certificate of deposits start rolling, COFI as a whole cannot go high. So the movement of COFI is quite slow.
Disadvantages:
- The COFI grows more quickly than it falls. It takes about a year or two to lower its value after the market rates fall.
- It is difficult to predict the nature of COFI with respect to other interest rates in the market as the rates can fluctuate any moment.
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Cost of funds index lags in market interest rate trend in both upward and downward movements. Therefore ARMs tied to this index fall or rise very slowly, which is good foe you if the rates are rising but not good for you if rates are falling. Rates of COFI for the last 1 year are given below.
| Period | COFI Rates |
| Jun 05 | 2.67 |
| Jul 05 | 2.75 |
| Aug 05 | 2.87 |
| Sep 05 | 2.97 |
| Oct 05 | 3.07 |
| Nov 05 | 3.19 |
| Dec 05 | 3.29 |
| Jan 06 | 3.34 |
| Feb 06 | 3.60 |
| Mar 06 | 3.62 |
| Apr 06 | 3.76 |
| May 06 | 3.88 |
1-WHY IS THE COFI SO STABLE?
The COFI is a weighted average of approximately $350 billion in assets. Because it is an average it doesn’t move very fast. This protects the interest rate of a COFI loan from fluctuating quickly.
Also, the COFI does not move with other indexes. The Cost of Funds Index loan is NOT market dependent. In 1994, the Federal Reserve raised rates 7 times. This resulted in the Prime Rate, one year T-Bill and other indexes going up over 3% in a one-year period. COFI stayed virtually unchanged because it represents the cost for banks to do business
2-LITTLE KNOWN FACTS ABOUT COFI
COFI has a foreclosure rate of less than 1%, the lowest in the country.
Historically the COFI index has been between 2.5% and 4.3%.Some COFI loans are convertible to fixed rate.
COFI at its worst case increase still has lower payment than a fixed rate.
More than half of the deposits in the 11th District are held by 4 institutions.
Not one COFI loan has reached its lifetime cap.No time in history has a COFI loan cost a borrower more money than a fixed rate loan. Research over a 10 year period from 1981 to 1991 provided by First Boston concluded that the people who took out adjustable rate mortgages saved an average of 25% in interest costs as compared to fixed rate mortgages.
COFI interest rates go down faster than they go up.
COFI has more potential for rapid amortization than deferred interest over the life of the loan; and
Alan Greenspan has a COFI loan.
The COFI is a weighted average of approximately $350 billion in assets. Because it is an average it doesn’t move very fast. This protects the interest rate of a COFI loan from fluctuating quickly.
Also, the COFI does not move with other indexes. The Cost of Funds Index loan is NOT market dependent. In 1994, the Federal Reserve raised rates 7 times. This resulted in the Prime Rate, one year T-Bill and other indexes going up over 3% in a one-year period. COFI stayed virtually unchanged because it represents the cost for banks to do business
2-LITTLE KNOWN FACTS ABOUT COFI
COFI has a foreclosure rate of less than 1%, the lowest in the country.
Historically the COFI index has been between 2.5% and 4.3%.Some COFI loans are convertible to fixed rate.
COFI at its worst case increase still has lower payment than a fixed rate.
More than half of the deposits in the 11th District are held by 4 institutions.
Not one COFI loan has reached its lifetime cap.No time in history has a COFI loan cost a borrower more money than a fixed rate loan. Research over a 10 year period from 1981 to 1991 provided by First Boston concluded that the people who took out adjustable rate mortgages saved an average of 25% in interest costs as compared to fixed rate mortgages.
COFI interest rates go down faster than they go up.
COFI has more potential for rapid amortization than deferred interest over the life of the loan; and
Alan Greenspan has a COFI loan.