What is a Cost of Funds Index?

 The cost of fund index, COFI, refers to the interest rate's weighted average that banks compensate on savings accounts held by their clients and their financial creditors. The interest charged by banks are determined by the banks cost of fund index.

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How Does the Cost of Funds Index Work?

The interest rate a borrower of mortgage or loan pays is partly calculated by the index rate the bank applies. Banks have to use COFI to ascertain what to charge in interests to compensate the interests they pay out together with margin. Even though COFI has continuously become out of date, it is commonly used to calculate the variable rate loans' cost, The COFI is determined both regionally and federally.The indexes are printed when it's approaching the month end and can be adjusted again until the subsequent issue. That indicates that the interests rates attached to the cost of funds index gap after the rate tied to other indexes, occasionally by many months. Although, similarly to other indexes, the COFI rate is most probably directly proportional to the interest the customers pay. For instance, if the COFI rate moves up, borrowers will most likely pay more interests and vice versa.

Cost of Funds Index Example

Interest rates rose sharply in January 2010 at the peak of the Great Recession. This was attributed to the extraordinary leap in COFI rates.The rise resulted from the Wells Fargos acquisition of Wachovia, which reduced Wachovias low borrowing rates from the COFI formula because Wells Fargo was never a member. Due to the rise in COFI rate, borrowers remained to utilize extra dozens every month in interest rate payment on their variable rate mortgages. COFI rate has only reduced gradually as from that time despite the rise resulting in a temporary spike.