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Mortgage Library: Types of Mortgage Loans: COFI-indexed ARMs

COFI-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, every six months, or every year.

Many COFI-indexed ARMs often have payment caps, but no periodic interest rate caps creating the possibility for negative amortization (your loan balance can 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 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).

Advantages of COFI ARMs:

  • 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. 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 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 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 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 be particularly careful to study the product before you make your choice.

Looking for a COFI loan? Get free personalized rate quotes from hundreds of mortgage lenders!


Related Articles:

Negatively Amortizing Loans
11th District Cost of Funds Index (COFI)
Market characteristics and historical performance.
History of the 11th District COFI


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