
              
  Fiscal Year 2016   Fiscal Year 2015 
Adjusted Net Interest Expense and Cost of Funds   Amount   % ^{1}   Amount   % ^{1} 
Interest expense:         
Interest expense on mortgage borrowings   $  355 
  0.79  %   $  229 
  0.47  % 
Periodic interest costs of interest rate swaps previously designated as hedges under GAAP, net   39 
  0.09  %   101 
  0.21  % 
Total interest expense   394 
  0.88  %   330 
  0.68  % 
Other periodic interest costs of interest rate swaps, net   255 
  0.57  %   393 
  0.81  % 
Total adjusted net interest expense and cost of funds   $  649 
  1.45  %   $  723 
  1.49  % 
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1.  Percent of our average mortgage borrowings outstanding for the period. 
The principal elements impacting our adjusted net interest expense are the size of our average mortgage borrowings outstanding during the period, the size of our average interest rate swap balance outstanding (excluding forward starting swaps), the average interest rate on our borrowings and the average net pay rate on our payfixed receivefloating interest rate swaps. The following is a summary of the estimated impact of each of these elements impacting the decrease in our adjusted net interest expense for fiscal year 2016, compared to the prior year period (in millions):

           
Impact of Changes in the Principal Elements of Adjusted Net Interest Expense 
Fiscal Year 2016 vs. 2015 
   Due to Change in Average 
 Total Increase / (Decrease)   Borrowing / Swap Balance   Borrowing / Swap Rate 
Interest expense on mortgage borrowings  $  126 
  $  (21  )   $  147 

Periodic interest rate swap costs ^{1}  (200  )   (23  )   (177  ) 
Total change in adjusted net interest expense  $  (74  )   $  (44  )   $  (30  ) 
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1.  Includes amounts recognized in interest expense and in gain (loss) on derivatives and other securities, net in our consolidated statements of comprehensive income. The change due to interest rate reflects the net impact of the change in the weighted average fixed pay and variable receive rates. 
The average interest rate on our borrowings increased for fiscal year 2016 by 32 bps, which was largely a function of Fed Funds rate increases in December of 2015 and 2016. The size of our average borrowings outstanding decreased 8% for the year, which was largely due to the combination of a relative shift from Agency RMBS to TBA holdings and portfolio adjustments due to the decline in our average shareholders' equity. As shown in the tables below, the size of our interest rate swap portfolio increased relative to our mortgage borrowings, but decreased overall in both absolute dollar terms and relative to the combined total of our mortgage borrowings and TBA securities outstanding during the year. We generally ran a lower interest rate hedge ratio thoughout much of 2016, compared to the prior year, before increasing our hedge ratio during the fourth quarter of 2016. The decline in the average net pay rate on our payfixed receivefloating interest rate swaps was a function of both a lower average payfixed rate and a higher average receivefloating rate.
The table below presents a summary of our average mortgage borrowings and our average interest rates swaps outstanding, excluding forward starting swaps, for fiscal years 2016 and 2015 (dollars in millions):

        
  Fiscal Year 
Average Ratio of Interest Rate Swaps Outstanding (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding   2016   2015 
Average mortgage borrowings   $  44,566 
  $  48,641 

Average notional amount of interest rate swaps (excluding forward starting swaps)   $  33,541 
  $  35,220 

Average ratio of interest rate swaps to mortgage borrowings   75  %   72  % 
    
Weighted average pay rate on interest rate swaps   1.56  %   1.68  % 
Weighted average receive rate on interest rate swaps   (0.69  )%   (0.28  )% 
Weighted average net pay rate on interest rate swaps   0.87  %   1.40  % 