July 1, 2009

Cost of Funds Index Rises

Wiki: A Cost of Funds Index or COFI is a regional average of interest expenses incurred by financial institutions, which in turn is used as a base for calculating variable rate loans.

Why Do we Care

The COFI Index is used by mortgage lenders to set the cost of variable mortgages such as ARMs. Borrower's mortgage payments rise or fall based on COFI. The index is computed by what banks are paying on money markets, savings accounts and CDs.

The COFI tends to move far more slowly than other indexes for adjustable rate mortgages, such as one-year Treasuries or the prime rate. The 11th District Cost of Funds is more common in the West and the 1-Year Treasury Security is more common in the East. Buyers would prefer the slowly moving 11th District Cost of Funds and investors the 1-Year Treasury Security.

Cost of Funds Increase over last month, but is significantly down from last year. This month the COFI is 1.38, this time last year it was 2.918. The natural tension between increasing economic activity in a fragile recovery and the rising cost of money will determine the length and strength of the recovery.
* Chart courtesy of moneycafe.com

Howard Bell


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