The financial acronym COFI stands for Cost Of Funds Index which is used as a common index for ARM agreements banks have with home owners. To be more exact COFI is short for “The 11th District Monthly Weighted Average Cost of Funds Index“

The COFI is calculated using the following criteria:

Savings and loan companies that are approved members (COFI Reporting Members) of the Federal Home Loan Bank of San Fransisco (aka – FHLBSF) report their true interest rate expenses within a particular month. The members presently included are from California, Nevada, and Arizona.

Banks that use the COFI index often use them for Option ARMs whereby the property owner(s) choose to pay a typical amortization style payment or an interest-only payment during the term. The borrower can also choose to make a minimum payment on the ARM.

A COFI indexed ARM can be good or bad for the real estate owner depending on their discipline and usage of the loan.

Good: The COFI ARM can be good for the property owner so they can manipulate their tax returns by making lump sum payments.

Bad: The COFI ARM can be bad for the borrower because their is often no cap on the rate at time of adjustment. This is how the inexperienced homebuyer can end up in trouble.

Generally COFI ARMs are utilized by the investor class of borrower so they can control their cash flow easier and leverage other investments with greater ease because the COFI ARM allows for negative amortization.

Your typical homeowner who gets a mortgage for their family home will generally choose a LIBOR based ARM.