Cofi Loans can give you a lower payment. When interest rates move higher, many borrowers to look for loans like Cofi loans that offer an alternative to higher-priced fixed-rate mortgages. Until recently, adjustable-rate mortgages including (ARMs) Cofi Loans have provided a viable alternative. ARMs could save a homebuyer a significant amount of money at least for the first several years, compared to fixed rates. Traditional ARMS had been tied to one of several Treasury Indexes.
This has created a void for borrowers seeking a lower rate and payment for the first few years. Jumping back on the scene in an attempt to fill the void is the cost of funds index or COFI loans. Cofi loans aren't new but they have been gaining popularity recently. Also, there are quite a few competing indexes which are detailed in my Adjustable Rate Mortgage Cofi loans section.
COFI loans give clients a sense of 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.
This is where 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. There is an important difference between the amount of the payment and the amount being charged as a result of the actual interest rate. If the rate of interest is higher than the amount being paid in the minimum payment the difference is added to the principal balance.
This is known as negative amortization. Someone borrowing 200,000 and making their minimum mortgage payments for two years, could find their mortgage debt has swelled to $215,000 rather than reducing it to $197,000. However, this type of loan gives you a great deal 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.
Often times the cost of funds index may be sold or publicized as an index that is less volatile than ARMs pegged to one-year Treasury bill yields (the normal structure for most ARMs) because it lags behind the one-year Treasury bill. This is another reason to steer clear of COFIs. If interest rates have risen significantly they may now be peaking. Therefore, the index on the COFI loan will probably continue to rise long after interest rates on other mortgages decline. Another issue I have 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. Did you know that there are only 2 large national lenders currently offering COFI? Did you know that one of these 2 mega banks owns 62% of all the banks that make up the 11th District? It really scares me when a lender has such control over the index and I no longer recommend them. A much better choice is either the LIBOR or MTA index and they are detailed in the adjustable rate mortgage Cofi loans section
I have added a website dedicated solely to Cofi Loans.
Here is a useful Cofi Loans payment calculator
Read very important information about Cofi Loans Prepayment Penalties
Read more about Cofi Loans Closing Costs
This type of mortgage can offer an exceptionally low rate and great flexibility in managing your mortgage. I have more information about similar products in the Cash Flow Arm section that may be of interest
I have developed an Adobe document detailing this program. Send an email requesting a copy of "Understanding Cofi Loans".
As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your consumer and mortgage debt is structured today can have a life changing effect in the years to come. Read more about this free, no obligation service.
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