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Understanding the Cost of Funds Index (COFI) and Its Legal Implications
Definition & Meaning
The Cost of Funds Index (COFI) is a benchmark used by mortgage lenders to determine interest rates on adjustable-rate mortgage loans. It reflects the average interest expenses that financial institutions incur, specifically in the 11th District of the Federal Home Loan Bank. This index is calculated based on the weighted average costs of savings, borrowings, and advances from banks and savings and loan associations. Unlike other variable-rate loans, COFI rates tend to change more slowly, providing stability for borrowers. COFI is often used in regions like California, where many mortgage loans are linked to the Federal Home Loan Bank of San Francisco.
Table of content
Legal Use & context
COFI is primarily used in the context of mortgage lending and real estate finance. It plays a crucial role in adjustable-rate mortgages (ARMs), where the interest rate is periodically adjusted based on the COFI. Legal professionals may encounter COFI in transactions involving residential mortgages, refinancing, and loan agreements. Users can manage some aspects of these transactions themselves with the help of legal forms and templates available through platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
One example of COFI in action is a homeowner with an adjustable-rate mortgage that adjusts annually based on the COFI. If the COFI increases, the homeowner's monthly payments will also rise accordingly. Conversely, if the COFI decreases, their payments may lower.
(Hypothetical example) A borrower takes out a mortgage indexed to COFI, and over the course of five years, the COFI fluctuates between 2.5 percent and 3.5 percent, impacting their monthly payments.
State-by-state differences
State
COFI Use
California
Commonly used for adjustable-rate mortgages.
Texas
Less common; other indexes may be preferred.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Difference
LIBOR
London Interbank Offered Rate, used as a benchmark for various loans.
LIBOR is international, while COFI is region-specific.
Prime Rate
The interest rate that commercial banks charge their most creditworthy customers.
Prime rate is generally higher and more volatile than COFI.
Common misunderstandings
What to do if this term applies to you
If you are considering an adjustable-rate mortgage linked to COFI, it's important to understand how changes in the index may affect your payments. You may want to consult with a mortgage professional or attorney to discuss your options. Additionally, you can explore US Legal Forms for templates and resources to assist you in managing your mortgage documentation.
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