This is a oft asked question by people who's ARM just went adjustable. Now they want to know all they can about how their interesti ratei is calculated. If this is the reason why you are here, then we recommend that you refinance your loan and get out of that ARM.

Basics

Simply put, the Cost of Funds Indexii (COF) (also known as the 11th District Cost of Funds) is a monthly weighted average that is published by the Federal Home Loan Bank of San Francisco. The COF has been published every month since August 1981.

Very few people understand what the COF represents, what affects it or even how the COF is calculated. We will try to provide some information without getting too technical.

History

Before the monthly 11th District COF Index was published there was the semiannual weighted average COF. The first issue covered January through June and the second July through December. Trivia Tidbit: The Federal Home Loan Bank of San Francisco was the first Federal Home Loan Bank to publish a COF index on a monthly basis.

How does it work?

The basis of the calculations used to figure the COF is the liabilitiesi at the banks which make up that district, things such as money on depositi, money loaned, and money borrowed. The interest that was paid on these funds is considered cost, thus the Cost of Funds or COF.

The ratio of the dollar amount paid in interest during the month to the average dollar amount of the funds for that month constitutes the weighted average cost of funds ratio for that month.

The average cost of funds is said to be weighted because the three kinds of funds and their costs are added together before a ratio is computed rather than calculating averages individually for the three sources and using a simple average of the three ratios. This gives the greatest weight to the interest paid on deposits, and explains the delayed reaction of the index to rising fixed-rate mortgages.