Cofi mortgage products are flexible. When interest rates move higher, many borrowers to look for a mortgage that offers an alternative to a higher-priced fixed-rate mortgage. Adjustable-rate mortgages (ARMs) including Cofi mortgage products have provided a viable alternative. A Cofi mortgage could save a homebuyer a significant amount of money at least for the first several years, compared to fixed rates. Email Cofi mortgage questions
This has created a void for borrowers seeking a lower rate andpayment 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 mortgage. This Cofi mortgage isn’t new but it has been gaining popularity recently. Also, there are quite a few competing indexes which are detailed in my Adjustable Rate Cofi Mortgages section.
COFI Mortgage products have a very low starting or "teaser" rate, typically for the first one to three months. The loan rate then becomes a combination of the chosen index and your margin.
COFI Mortgage products give clients a sense of security because the minimum payment changes annually. Each year the Cofi mortgage payment can only increase by 7.5%.
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 loan will probably continue to rise long after interest rates on other products decline. Another issue I have with them 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 them? 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 Cofi mortgage section
Read very important information about Cofi Mortgage Prepayment Penalties
Read more about Closing Costs
This type of product can offer an exceptionally low rate and great flexibility in managing your finances. I have more information about similar products in the Cash Flow Arm section that may be of interest
As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your 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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