COFI ARM (Cost of Funds Index Adjustable Rate Mortgage) - the rate is normally fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the 11th district cost of funds index (COFI) which is added to a pre-determined margin (typically ranging between 2.25-3.00%) to arrive at the new monthly rate. This loan may also have periodic payment caps and therefore the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be. (Also see anatomy of an ARM for additional information).

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The cost of funds index (COFI) is not an interest rate. It reflects the average interest paid by savings institutions for their various sources of funds over a specified period of time. Deposits in checking and savings accounts — including certificates of deposit, money market deposit accounts, transaction accounts, and passbook accounts — are the primary source of funds for most savings institutions. Other sources of funds include loans obtained through the credit programs of the Federal Home Loan Bank of San Francisco (known as "advances") and money borrowed from other financial institutions.

In general, the COFI does not move up or down as rapidly as market interest rates (such as the prime rate, the discount rate, or Treasury bill rates) because many savings institutions rely on fixed rate deposits of medium- and long-term maturities as a primary source of funds. Since rates on these deposits are not affected by changing market interest rates until the deposit matures, the total interest expense paid by savings institutions in a particular month reflects, to a significant degree, interest rates that were prevalent in previous months or years.