Which index is commonly used to determine interest rates for adjustable rate mortgages?

Which index is commonly used to determine interest rates for adjustable rate mortgages?

• A. COFI
• B. LIBOR
• C. SOFR
• D. Prime Rate

Answer: (A)

The correct answer is the COFI, or Cost of Funds Index. This index is frequently used by lenders to set the interest rates on adjustable-rate mortgages (ARMs). COFI is based on the monthly cost of funds for savings accounts in the California market, reflecting the average interest rates that banks pay for their funds in that region. Because it is directly linked to the financial environment and requires lenders to consider the actual cost of borrowing, it is a suitable choice for determining interest rates on ARMs. Other indices, such as LIBOR (London Interbank Offered Rate) and SOFR (Secured Overnight Financing Rate), do play significant roles in the broader market for various financial products, including mortgages, but they are not as commonly used in the context of adjustable rate mortgages in Florida. The Prime Rate, which is often associated with consumer loans, is typically not the index used to adjust ARMs either. Each index has its unique applications and relevance in different financial contexts, which is essential for understanding the dynamics of mortgage interest rates.

The correct answer is the COFI, or Cost of Funds Index. This index is frequently used by lenders to set the interest rates on adjustable-rate mortgages (ARMs). COFI is based on the monthly cost of funds for savings accounts in the California market, reflecting the average interest rates that banks pay for their funds in that region. Because it is directly linked to the financial environment and requires lenders to consider the actual cost of borrowing, it is a suitable choice for determining interest rates on ARMs.

Other indices, such as LIBOR (London Interbank Offered Rate) and SOFR (Secured Overnight Financing Rate), do play significant roles in the broader market for various financial products, including mortgages, but they are not as commonly used in the context of adjustable rate mortgages in Florida. The Prime Rate, which is often associated with consumer loans, is typically not the index used to adjust ARMs either. Each index has its unique applications and relevance in different financial contexts, which is essential for understanding the dynamics of mortgage interest rates.