Cohousing-L Mailing List: Re: Mortgage loans

[George Dodge (realtor1]

On Thu, 9 Feb 1995, Deborah Behrens wrote:

> I am still a beginner at loans and hope to get some advice from wiser,
> more experienced homeowners.  Am wondering what peoples' experiences 
> have been regarding different types of mortgage loans.  I've been offered
> a choice of 30 year fixed and a 6moCOFI as my current best alternatives.
> <snip - remainder deleted>
> 
> 
The COFI ARM is an adjustable rate mortgage tied to the Cost of Funds 
Index (the interest rate paid by member banks to borrow money overnight).
I believe you are in the 11th district, so the FHLB of San Francisco 
refers to this as the 11th District Cost of Funds index. A 6-month ARM 
means your payment is adjusted twice a year (ie., payments are level 
for 6 month periods).  

The COF index is quite stable and slow moving.  It's based on short term 
rates and is therefore resistant to large fluctuations, while other 
indices such as T-Bills and Prime Rate are quite jerky.  When interest 
rates are climbing, the COFI will lag behind and produce an overall lower 
mortgage rate.  When interest rates are dropping, the COFI will lag 
behind and may even continue to climb for a while.  When other rates 
bottom out, the COFI will continue to drop.  It's a safer bet than most 
for an adjustable rate mortgage index.  

If current fixed rate mortgages in your area are offered at 9%, it would 
cost $750 to "rent" $100,000 for one month.  A COFI ARM at 5.9% would 
cost $491.67 a month for the same amount.  The question is, what would 
you do with the $258.33 difference?  Whether 'tis wiser to opt for the 5.9%
6moCOFI ARM vs. a 9% fixed rate mortgage depends on this question and 
several others:

   1.  How long will you own the home secured by this mortgage?
   2.  Where do *YOU* see interest rates heading in a few years?
   3.  What are your savings habits and financial discipline:
         - can you realistically save some of the difference
           to cover higher future payments if you opt for COFI?
         - or, will you *really* apply the difference to pre-payment 
           of the principal (it'll have a huge impact in just a 
           few years)?
   4.  How old are you, are you risk-takers, do you anticipate
       future increases in income or expenses, are you financially
       stable and can you afford higher payments, how many "points"
       (percentage of the loan) will you pay for each type, etc.
  
The adjustable rates are substantially below fixed rates right now.  Other 
factors notwithstanding, it would take a 3.1 point jump in the COFI to 
equal what you'd pay for today's fixed rate loan.  The fixed rates would 
then be above 12% (remember, the COFI lags), higher than the LIFE CEILING 
on the ARM loan.   When rates drop, there is a possibility, however slim, 
that the COFI ARM rate will fall below the start rate.  

Other factors to consider: ARM loans are generally assumable by a qualified 
buyers, while fixed rate mortgages are not; an ARM may allow you to qualify 
for a higher mortgage that you would normally receive at fixed rates; and 
you may need less of a down payment with an ARM loan (but PMI - Private 
Mortgage Insurance - may be required with a smaller down payment).

Long term interest rates are much higher today than a year ago, but short 
term rates are not proportionally higher.  All in all, I believe ARMs 
are a good buy today.  Of course, the best buy would have been last year 
when fixed rates were at a twenty-five year low! <grin>

For more information on real estate, mortgage loans, indices and legal 
questions pertaining to real estate, please feel free to call my bulletin 
board, The Real Estate Office BBS at 801-565-9617 (it's in Salt Lake 
City). There are over a thousand software programs available to 
download too, many of them real estate-specific.  The system is public 
and anybody may register and download on the first call.  I maintain a 
North American Real Estate BBS list which contains local phone numbers 
for public access boards throughout the USA and Canada.

If you have full internet access, you can also point your web browser to 
Intermountain RealtyNet at << http://www.xmission.com/~realtor1 >> for 
hypertext links to all the known global real estate web sites.  There is 
a sub-section on Finance & Lending where you'll find links to connect 
with banks, savings and loans and mortgage brokers, all of whom can be 
sources of valuable information.   

Health, happiness, long life and prosperity to you, Deborah!           
      
####   George Dodge, Realtor * Salt Lake, UT * realtor1 [at] xmission.com   ####
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