Michael Holigan: We're going to back a few weeks on this Mortgage Moment and cover a few items that we didn't cover last time about adjustable rate mortgages. We get a number of letters people asking about COFI's, LIBOR's and other types of indexes and that's all that it really is, it's an index. It's a financial institution that we base our rates on.
Now a COFI is a Cost of Funds Index. A LIBOR is London Interbank Offered Rate. And they're really not that much different from Treasury's which we use when we're doing the FHA adjustable rate mortgages. They can change any amount of time and that's one thing you need to ask about, how often do they change. You can use a six-month average. You can use a one-year average. You can use a five-year average. And then your rage adjusts accordingly to what those averages are. And that's all that LIBOR's and COFI's do. They're just a different way to average interest rates.
Let's look at some tips. One: ask for the history of that index. You want to see what it's been doing over the last five years. It's important what it's at right now, but did it go up, did it go down, what happened over the last few years? You're going to have to live with that loan, so make sure that you can.
Also, add the margin to determine how it compares to a fixed rate. Did it go above fixed rates most of the time? Did it stay even with it most of the time? Was it below it? What you want is something that stays even or below the fixed rate most of the time to save you money.
Also, select the most stable fund. Nothing volatile. Nothing from the early '80's that went way up and way down. It could get you into some trouble. You want payments that you can make month after month, the whole time you live in that house.
So talk with your lender. Sit down, look at all the different indexes and find what's stable and best for you.
Episode 013 1995 - 96 Season
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