What’s A “Coffee” Mortgage – And Why Do I Want One?
Mortgages generally fall into two camps: Those with fixed rates and those with adjustable rates. Adjustable-rate mortgages (ARMs) typically have an interest rate which is based on two factors. First, there’s a “margin” which does not vary during the term of the loan. Second, there’s an “index” which changes as often as the loan allows, say every month, six months or year.
Example: If the margin is 3 percent and the index is at 2.25 percent then the fully-indexed rate is 5.25 percent.
But imagine if the index for the same loan rose to 4.3 percent. The new rate would be 7.3 percent — the 4.3 percent index plus the 3 percent margin.
As a borrower you want an index the lender does not control. One of the best is the 11th District Cost of Funds Index – or the 11th District COFI (pronounced “coffee”). This index is based on an average interest rate paid by savings institutions served by the Federal Home Loan Bank of San Francisco.
The great attraction of the 11th District COFI is that it’s based on borrowing costs for lenders in several western states. It’s an index which is generally slow to rise — and slow to fall. Thus means it tends not to have the highest rates.
You can check the latest 11th District COFI online by pressing here.
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Syndicated originally by Content That Works and posted with permission.
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