We already explained how the Option ARM (i.e., MTA, COFI, CODI, COSI & LIBOR) mortgage works with its five monthly payments and most importantly how and why the Minimum payment option offers the lowest mortgage pmt. in the county thus increasing cash-flow. With this said, the right Option ARM could also give you a more favorable Interest-Rate than a comparable Fixed-Rate mortgage (apples-to-apples, e.g., same loan amount, same cost, etc..) If you had received a fixed-rate mortgage over the past 15 years, you would have most likely refinanced 3-5 times in order to get down to the recent 5%-6% Rates of today (i.e., 2005 & 2006); however, if you had received the right Option ARM, you would have saved thousands of dollars by not having to refinance over and over again paying all those Settlement fees as you would have a comparable interest rate today, i.e. 6%-7% range.
As an example, if you had obtained a MTA-Indexed program with a  Margin of 1.90% fifteen years ago and had been making the fully-indexed pmt. (Index + margin), you would have "averaged" an Interest-Rate or (fully-indexed rate) of 6.16% or (1.90% + 4.261%.) You would only have 15 years left on your loan balance and you would have incurred no negative amortization. Now the risk of any ARM vs. a fixed-rate is the ARM can move higher than the fixed, but you need to compare apples-to-apples, i.e. history.  For example, let's say you received a 30-yr. fixed-rate for a $250k mtg. back on 01/01/93 for 8.5% (zero points) and you could have also received an MTA-indexed Option ARM with a 1.90% Margin with its Index at 3.95% for a fully-indexed Rate of 5.85% (again assuming the same loan amount, no points, etc..); you would have been better off with the Option ARM even though today (11/01/06)  you would have a higher fully-indexed Rate of 6.73% (4.83% + 1.90%) which might be slightly higher than what you could get on a fixed-rate today, but again, you need to remember that you would have needed to refinance several times over those 15 years to get down to that low 5-6% fixed rate.

So let us now discuss which Index moves the slowest, and which Option ARM program allows for the lowest Margin thus giving the safest and lowest fully-indexed Rate or Index + Margin. As we have already stated on our Option ARM Intro page, there are five Option ARM programs, i.e., MTA or Monthly Treasury Index, COFI or Cost Of Funds Index, CODI or Cost Of Savings Index -(this Index is being phased out by most Lenders), the CODI or Certificate Of Deposits Index and finally the LIBOR or London Interbank Offered Rate. Moreover, we also need to discuss which programs offer the lowest Life Caps and Starting Rates; - (again, you will find the MTA, COFI, CODI and LIBOR's "base" Starting Rate, Margin, Life Cap, Pre-payment penalty (if any) and Fully-indexed Rate located on the bottom of our Intro Page.

The MTA and COFI are always the top two programs offered as they are usually neck-in neck when it comes to their respective Fully-indexed Rates (index + margin) and Starting Rates, Life Cap and Underwriting guidelines.) The COFI has the slowest (and we feel the safest) moving Index in the county,  but many times the MTA program offers a lower Margin thus a lower Fully-Index Rate (index + margin.) The LIBOR usually offers a lower Margin than the MTA and COFI, but the Index is usually higher and is much more volatile than the COFI and MTA index. The CODI with its much higher Margins, offers a slow moving Index but it has a higher Starting Rate and Life Cap than the COFI, MTA & LIBOR, however its Underwriting guidelines are the most flexible of them all; in conclusion, if you are planning on keeping your home for 5+ yrs, the COFI is the best, then comes the MTA index.

 Let's begin with Cost Of Funds Index or COFI:

As of 12/2007 the COFI has averaged 3.981% over the past 15 years, and is currently at 3.970% - (see last 19 yr. mo movement.) If you had a 2.10% *Margin you would have averaged a fully-indexed rate of 6.08% for the past 15 yrs.

• more on the COFI

* Pls e-mail Greg for a Margin quote

________________________________________________________________________

Now lets take a look at the Monthly Treasury Index or MTA-Index:  

 As of 12/2007 the MTA-Index has averaged 4.227% for the past 15 yrs. and is currently at 4.662%; if you had a 1.90% *Margin you would have averaged a fully-indexed rate of 6.13% over the past 15 yrs. - (see last 17 yr. movement)

The 12-MTA Index is based on yields published in the release entitled the "Selected Interest Rates - H-15" which is published but the Federal Reserve Board on the first Tuesday of each month.  Home Loans Group Finance performs a simple calculation of the proceeding 12-month annual yield to come up with the current yield number. A further explanation is, the 12-month (Month Treasury Average) is based on the "average" annual monthly yields of U.S. Treasury Securities, (T-Bill) adjusted to a constant maturity of one year, as made available by the Federal Reserve.  This Index is determined by adding together the monthly yields for the most recent 12 months and dividing by 12.  And because it’s an average, higher yields in some months are offset by lower yields in others.

 Pls *e-mail Greg for a Margin quote

____________________________________________________________________

Cost Of Deposits Index  - CODI explained:

 The CODI from 1/1/1993 to 11/1/2006 has averaged 4.216% and is currently at 5.153% - (.. see recent history) 

The CODI or Certificate Of Deposits Index is published the first of every month. The CODI is the average of the most recently published monthly yields on 3-month certificates of deposit (secondary market) for the twelve most recent calendar months as published by the Federal Reserve Board ("Index".) 3-month certificates of deposit (secondary market) are an average of dealer offering rates on nationally traded certificates of deposit that are annualized based on a 360-day year or bank interest. The Federal Reserve Board publishes the index in its Federal Reserve statistical release, H-15.

The calculation is averaged by adding the twelve most recently published monthly yields together and dividing the result by twelve (12), then this result is rounded to the nearest 1,000th of one (1) percentage.

CODI responds more quickly to the changes in the marketplace than either COFI or COSI.  CODI index is published mid-month; the index is slightly more volatile than the COFI  because it has a smaller pool of money deposited as it only includes 3 month C/Ds from Savings & Loans sponsored by the Federal Reserve Board. We no longer offer the CODI or COSI as their Margins and life caps are too high even though the Index is excellent.

___________________________________________________________________

LIBOR:

London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarkets in terms of volume.

The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. At this time we are not promoting the LIBOR as we feel the COFI program is the best for long term financing (5+ yrs) and the MTA index for less than 5 yrs.

_____________________________________________________________________

COSI recent movement:

This index is the weighted average of the rates of interest on the deposit accounts of the federally insured depository institution subsidiaries of Golden West Financial Corporation (GDW) - Wachovia recently purchased World Savings/Golden West. All of the depository institution subsidiaries of Golden West Financial Corporation operate under the name World Savings.

World Savings receives money from consumers in the form of deposits and lends money as home or other loans. The interest rates in effect on these deposits are the basis for the COSI index. It is not based on actual interest paid, but rather the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month.

The COSI adjusts monthly and has a one-month reporting lag. It is computed on the last day of each calendar month and is announced on or near the last business day prior to the fifteenth day of the following calendar month.

We no longer offer the CODI or COSI as their Margins and life caps are too high even though the Index is excellent.

Back