Indexes for adjustable rate mortgages are one of the most confusing factors when considering your mortgage options. Indexes are used to calculate the rate of interest of your mortgage. Indexes based on average rates include the 11th District Cost of Funds Index (COFI) and the 12-month Treasury average. The 11th district covers Arizona, California and Nevada. The index is published on the last day of the month and reflects the cost of funds for the prior month. The 11th District COFI is commonly used as an index for adjustable-rate mortgages.
When interest rates move higher, borrowers look for loans that are an alternative to the high-priced, fixed-rate mortgages. Traditional ARMS had been tied to one of several Treasury Indexes.
COFI loans have a very low starting rate, usually for the first one to three months. The loan rate then becomes a combination of the chosen index and your margin.
COFI loans give borrowers security because the minimum payment changes annually. Each year the monthly payment can only increase by 7.5 percent of the previous year’s monthly payment.
But this is also where the confusion sets in.
While the minimum payment remains the same for the first year and can only increase gradually each year thereafter, the actual interest rate can climb higher based on what the index is doing.
On the alternative, COFI loans gives you a lot of flexibility in that you have four choices every month on how to repay the loan. Minimum Payment, Interest Only, 30 year fully amortizing, and 15 year fully amortizing.
Another reason to take a close look at COFI loans before you apply is that sometimes the cost of funds index may be publicized as an index that is less changeable than ARMs pegged to one-year Treasury bill yields because it lags behind the one-year Treasury bill.
Another issue to consider with COFI loans is that their index is made up from the cost of funds index for the 11th District of the Federal Reserve system located primarily in California. Since there are only 2 large national lenders currently offering COFI loans and one of these 2 mega banks owns 62% of all the banks that make up the 11th.
This type of mortgage can however,offer an exceptionally low rate and great flexibility in managing your mortgage. Choosing a index to base your mortgage on is a tricky situation that requires a trained professional