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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:
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