The Real Estate Beginners Guide to the Cost of Funds Index (COFI) in 2025

In real estate, mortgage rates are influenced by several financial benchmarks, one of which is the Cost of Funds Index (COFI). The COFI reflects the weighted average interest rate that financial institutions pay to obtain funds for mortgage lending. It plays a key role in determining the interest rates on certain adjustable-rate mortgages (ARMs).

For homeowners, lenders, and investors, understanding COFI is essential. Borrowers tied to a COFI-based ARM may see their monthly payments change as the index shifts. For lenders, COFI provides a measure of funding costs, directly influencing profitability and loan pricing.

This guide will explore what COFI is, how it is calculated, its impact on mortgages, and its relevance in today’s real estate market.

What Is the Cost of Funds Index (COFI)?

The Cost of Funds Index (COFI) is a financial benchmark that tracks the average interest rate paid by financial institutions—primarily savings and loan associations—for the funds they use in mortgage lending.

In practice, COFI is:

• A regional index historically based on institutions in the western U.S., especially California.

• Published monthly, reflecting the prior month’s funding costs.

• Used to adjust interest rates on certain adjustable-rate mortgages.

How COFI Works in Real Estate

When borrowers have an ARM tied to COFI, their mortgage interest rate is adjusted periodically based on changes in the index plus a fixed margin set by the lender.

For example:

• If the COFI is 3.0% and the margin is 2%, the ARM rate becomes 5.0%.

• If COFI rises to 3.5%, the ARM adjusts to 5.5%, increasing the borrower’s monthly payment.

Why Lenders and Borrowers Use COFI

For Lenders:

• Reflects their actual funding costs.

• Helps align mortgage pricing with market realities.

For Borrowers:

• Often more stable than other indexes (e.g., LIBOR, SOFR, Treasury Bill index).

• Reduces sudden volatility in ARM adjustments.

Advantages of COFI

• Stability: Historically less volatile compared to other indices.

• Transparency: Published monthly and available to the public.

• Regional Accuracy: Reflects funding costs specific to institutions in certain markets.

Disadvantages of COFI

• Regional Limitations: Primarily based on western U.S. institutions, making it less representative nationally.

• Lagging Indicator: Reflects past funding costs, so it reacts slowly to market changes.

• Declining Use: Over time, COFI has been replaced by broader benchmarks like SOFR.

COFI vs. Other Mortgage Indexes

Practical Example of COFI in Action

A borrower takes out an ARM tied to COFI with the following terms:

• Initial fixed rate: 4.25% for 3 years.

• After the fixed period, rate = COFI + 2% margin.

• If COFI at reset is 3.1%, the new mortgage rate becomes 5.1%.

This adjustment directly changes the monthly payment, demonstrating how COFI impacts affordability.

COFI in 2025

Although COFI has become less widely used due to the rise of SOFR (Secured Overnight Financing Rate), it still plays a role in some legacy ARMs and in certain regional lending markets. In 2025, borrowers with older COFI-based loans should carefully monitor index changes to anticipate adjustments in their payments.

Trends include:

• Transition to SOFR: Many lenders now prefer SOFR for its broader applicability.

• Legacy Mortgages: Some borrowers remain tied to COFI-based ARMs until refinancing or payoff.

• Regional Influence: COFI retains importance in areas where savings institutions dominate.

Frequently Asked Questions

What is the Cost of Funds Index (COFI)?
It’s an index measuring the average interest rate savings institutions pay for funds used in mortgage lending.

Who publishes COFI?
Historically, the Federal Home Loan Bank of San Francisco published it.

Does COFI still exist in 2025?
Yes, but its use has declined, with SOFR becoming more common for new loans.

How does COFI affect my mortgage?
If your ARM is tied to COFI, changes in the index will adjust your mortgage interest rate.

Is COFI better than SOFR?
COFI tends to be more stable, but SOFR is now the preferred benchmark for most lenders.

Can I refinance out of a COFI-based mortgage?
Yes, borrowers can refinance into fixed-rate or SOFR-based ARMs.

Is COFI used outside the U.S.?
No, it is primarily regional to the western U.S.

Does COFI affect fixed-rate mortgages?
No, it only impacts adjustable-rate loans tied to the index.

Why is COFI less volatile than LIBOR?
Because it reflects actual institutional costs of funds rather than interbank lending.

Will COFI disappear completely?
It may phase out gradually as more loans shift to SOFR, but legacy loans keep it relevant.

Related Terms and Concepts

• Adjustable-Rate Mortgage (ARM): A loan with an interest rate that changes over time based on an index.

• Margin: A fixed percentage added to an index to calculate an ARM’s interest rate.

• SOFR (Secured Overnight Financing Rate): The primary benchmark replacing LIBOR.

• Refinancing: The process of replacing an existing mortgage with a new one, often to change index ties.

• Mortgage Index: A benchmark rate that determines adjustments in ARMs.

Wrap Up – Cost of Funds Index in Real Estate

The Cost of Funds Index (COFI) remains a key, though less common, benchmark in real estate lending. It measures how much financial institutions pay to borrow money, directly affecting the interest rates of ARMs tied to it.

While its use has declined in favor of broader benchmarks like SOFR, understanding COFI is crucial for borrowers with legacy ARMs and for investors analyzing older loan portfolios. In 2025, COFI still represents stability and predictability in certain regional lending markets, making it a valuable concept for anyone navigating real estate finance.

Do you want me to also draft an entry on SOFR (Secured Overnight Financing Rate) since it’s now the dominant replacement for COFI and LIBOR?