Understanding the 11th District Cost of Funds Index (COFI): How It Impacts Your Mortgage Rates

What is the 11th District COFI?

The 11th District COFI is a monthly cost-of-funds index that reflects the weighted-average interest rate paid by savings institutions in the 11th Federal Home Loan Bank District for savings and checking accounts. This calculation is based on the interest expenses and borrowed funds of member institutions within this district. Essentially, it provides a snapshot of how much these institutions are paying on their deposits and borrowings, which in turn influences the interest rates they offer on loans.

How is the 11th District COFI Used?

The 11th District COFI is predominantly used to set interest rates for variable-rate loans, such as adjustable-rate mortgages (ARMs). Here’s how it works: lenders add a margin to the COFI index to establish the final interest rate for these loans. For example, if the COFI is at 2% and the lender’s margin is 2%, the borrower’s interest rate would be 4%. This index tends to lag market interest rates, meaning that changes in market conditions may not immediately reflect in loan rates.

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Impact on Mortgage Rates

Adjustable-Rate Mortgages

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Changes in the COFI directly influence the interest rates on ARMs, affecting borrowers’ monthly payments. When the COFI increases, so do the interest rates on these loans, resulting in higher monthly payments. Conversely, a decrease in the COFI leads to lower interest rates and reduced payments. This lagging nature of the COFI means that rate adjustments are not immediate; instead, they are reflected at the end of the following month.

Lagging Nature

The lagging nature of the COFI can be both a blessing and a curse. On one hand, it provides stability by not reacting too quickly to market fluctuations. On the other hand, it can delay necessary adjustments, leaving borrowers either overpaying or underpaying based on outdated rates.

Discontinuation of the 11th District COFI

As of January 31, 2022, the 11th District COFI was discontinued due to a decline in the number of reporting financial institutions. This discontinuation has significant implications for existing loans tied to this index. Borrowers and lenders alike needed a replacement index to ensure continuity and stability in mortgage rates.

Replacement Index: Enterprise 11th District COFI Replacement

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To address this gap, Freddie Mac introduced the Enterprise 11th District COFI Replacement Index. This new index is based on the Federal Cost of Funds Index with a spread adjustment to ensure comparability with the old COFI. The calculation involves using current and historical spreads between the Federal COFI and the 11th District COFI to maintain consistency.

Calculation and Transition

The transition to this new index was designed to be smooth, with a one-year transition period. During this time, lenders could adjust their systems and borrowers could understand how their loan rates would be affected. The new index ensures that existing loans continue without significant disruption, providing a seamless transition from the old COFI.

Implications for Borrowers and Servicers

The discontinuation of the 11th District COFI and the introduction of its replacement have several implications for both borrowers and servicers. Borrowers need to understand how their loan rates will be calculated under the new index, while servicers must adhere to specific guidelines provided by Freddie Mac. This includes using the new index for all loans previously tied to the old COFI.

Source: https://summacumlaude.site
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