Which index is used to determine interest rate changes for certain adjustable-rate mortgages by reflecting the average cost of borrowing?

The Cost of Funds Index (COFI) is a key benchmark used to determine interest rate changes for certain adjustable-rate mortgages (ARMs). This index reflects the cost of borrowing for financial institutions and is specifically calculated based on the interest expenses incurred by a group of credit unions and other financial entities in the region. As such, when the COFI increases or decreases, the interest rates on the adjustable-rate mortgages linked to this index will adjust accordingly, impacting the monthly payments for borrowers.

In the realm of adjustable-rate mortgages, lenders often use indices to set the variable interest rates. The COFI is particularly considered more stable and reflective of actual borrowing costs in some regions, making it a preferred choice for certain mortgage products. This stability helps borrowers manage their financial expectations since fluctuations are typically less dramatic than some other indices.

The other indices mentioned have different properties or are used for different types of financial products. The Prime Rate Index, for example, is based on the rates commercial banks charge their most creditworthy customers, while LIBOR (London Interbank Offered Rate) historically served as a global benchmark for short-term interest rates before being phased out. The Treasury Index is tied to the yield on U.S. Treasury securities, which can also fluctuate based on market conditions