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COFI Loan indexed ARMs And Their Advantages

The 11th District Cost Of Funds is one of the most commonly used ARM indexes, because many lenders believe that an index that moves with their cost of funds reduces their risk. ARMs based on this index can adjust every month.

This index reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada.

Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.

The following graph illustrates the trend for the COFI index to lag other indexes:

It should be noted that although COFI generally follows trends in market rates, it can move in an opposite direction over the near term (these periods are marked in white on the historical graph above).

The 11th District Cost Of Funds Index is the slowest moving and most stable of all ARM indexes. It smoothes out a lot of the volatility of the market. Since its initial publication (in 1981) the annualized volatility of COFI has been only 6.2% compared with more than 20% for the 1-Year CMT index during the same period.

The 11th District Cost of Funds index is one of the most popular ARM indexes. This index is primarily used for ARMs with monthly interest rate adjustments. Because this index generally reacts slowly in fluctuating markets, adjustments in your ARM interest rate will lag behind another market indicators. Many lenders believe COFI-indexed ARMs are some of the best deals available on the market today.

Many COFI mortgage indexed ARMs often have payment caps, but no periodic interest rate caps creating the possibility for deferred interest (your loan balance may increase). However, it's not necessarily a bad thing because you may consider any unpaid (deferred) interest to be an extended loan at a very attractive rate. You can use your monthly savings (the difference between the fully indexed payment and the minimum monthly payment) for investments, or you can use them to pay off credit card and/or car debt. This makes some of the negatively amortizing COFI ARMs a great financial tool for homeowners (especially for people with unsteady income, such as self-employed or commissioned salespeople). In addition, you will always have the option to never increase your loan balance (by making the fully indexed payments instead of the minimum monthly payments).

In a speech to a credit union group, Fed Chairman Alan Greenspan questioned whether fixed-rate mortgages were the most cost-effective means of financing a home purchase. He said "American homeowners clearly like the certainty of fixed mortgage payments" but pay several thousands of dollars a year for the benefits.

Greenspan said homeowners "might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade"

Greenspan noted that if homeowners are "willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home." Feb. 24, 2004

Advantages of COFI Loan ARMs:

Flexibility in the monthly payment. It is one of the main advantages of COFI loan ARMs. With COFI indexed ARMs you will usually have a choice of payment options. Besides fully indexed and minimum payment options your COFI loan ARM will probably have an interest only payment option and you will be able to change payment options every month if you like.

Tax Planning. COFI loan ARMs may be used for tax planning. The borrower can defer interest payments and at the end of the year, analyze their tax situation. If it serves their tax interests, they can make a lump sum payment toward any interest that has been deferred and deduct it for tax purposes.

Easy qualifying. Many COFI loan lenders allow homebuyers with good credit to apply without documenting their income, assets, or source of down payment. This is helpful for self-employed borrowers or those who have jobs where it is difficult to document their income.

Low initial rate. Most COFI LOAN ARMs are offered with a very low initial rate. Some lenders will allow you to qualify for a larger loan due to this initially lower rate.

Summary

COFI LOAN ARM products provide more opportunities for financially savvy borrowers who seek more customized, and ultimately less costly, home-finance choices. However, because some of the COFI products do not offer rate caps or other key features to protect the borrower, you need to study the product before you make your choice.

The Federal Home Loan Bank

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Start payment rates, interest rates, payment rates, data and program guidelines are subject to change without notice, and are not guaranteed. Deferred interest may apply. APR (Annual Percentage Rate) changes on a daily basis depending upon market conditions. This is a brief outline with basic information only. Other restrictions and minimum loan amounts apply. Borrower should contact Florida Mortgage Corporation for current details and full written disclosures.