- The Washington Times - Friday, February 28, 2003

In the past 10 years, if you stuck to 30-year fixed-rate mortgages, you could have gotten a loan for as low as 5.5 percent at 2003 rates, to as high as 9.2 percent if you were looking for a loan in December 1994.

If you had stayed with the always-below-market Cost of Funds Index (COFI) loan, you never would have originated a loan for more than 5.589 percent. That's what the rate was in October 2000 when the fixed rate was at 7.8 percent. Today's rate for a COFI loan is just 2.375 percent on a mortgage.

When you consider that the highest the COFI has ever risen to since it has been tracked was a bit over 12 percent in 1980 (when fixed-rate mortgages were at more than 18 percent), it has been a pretty good mortgage instrument for the educated borrower.

So why wouldn't everyone have a COFI mortgage with those type of rates? Good question. Mostly, it's comfort level. There are no caps as to how high the loan can go and the rate can change which means your payment can change every month. Also, the COFI is reserved for only borrowers with really good credit.

All adjustable rate mortgage interest rates are based on some sort of index, whether it's the Treasury bond, prime rate or the COFI. According to the Web site for the Federal Home Loan Bank of San Francisco, which has current COFI numbers (www.fhlbsf.com), the rate "reflects the average interest paid by savings institutions for their various sources of funds over a specified period of time. Deposits in checking and savings accounts including certificates of deposit, money market deposit accounts, transaction accounts, and passbook accounts are the primary source of funds for most savings institutions."

If you have money in a bank savings account, you can attest to the fact that the rates paid to you for holding your money stays pretty stable and that's what the COFI loan is based on: the average of all these savings account rates from all the members banks that belong to Federal Home Loan Bank of San Francisco. When you go looking for it, it will be referred to as the 11th District Cost of Funds Index, since the San Francisco bank oversees the 11th district of the Federal Home Loan Bank system.

The COFI rate doesn't move as quickly as other adjustable rate indexes. You might say it's the tortoise of the ARM indexes, and that's what makes it so enticing.

The Kansas City Mortgage Authority Inc. has one of the best summaries of the COFI loan that I've seen on the Web (https://kansas-city-mortgage.net/) and what the COFI offers borrowers:

Flexibility in the monthly payment. It is one of the main advantages of COFI ARMs. With COFI-indexed ARMs, you will usually have a choice of payment options. Besides fully indexed and minimum payment options, your COFI 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 ARMs may be used for tax planning. Borrowers 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 lenders allow home buyers 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 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.

Some COFIs have a payment cap rather than an interest rate cap, meaning your payment will never go higher than a certain amount say $1,500 per month. But if the interest rate rises too high, you could be making payments that are too low and find yourself in a negative amortization situation. In other words, you're not paying enough to pay off the loan in the originally agreed-upon term. So if your maximum payment is $1,500, but you should be paying $1,600 per month, the extra $100 will be added on to the end of your loan. Thus, you'll have to make more payments than the originally agreed-upon number.

On the other hand, most people don't keep the same loan for the length of the term in the loan amount. So, the negative amortization may not be a big concern. Consult with your mortgage provider or financial planner to see if this program works for you.

M. Anthony Carr has written about the real estate industry for more than 14 years. Reach him by e-mail ([email protected]).

Copyright © 2019 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide