During periods of declining rates you're better off with a mortgage tied to a leading index. A loan tied to a lagging index, such as COFI, is more desirable when rates are rising, since the index rate will lag behind other indicators. One of the things to assess when looking at adjustable rate mortgages is whether we're likely to be in a rising rate market or a declining rate market. In truth, there are no good or bad indexes, and when compared at macro levels, there aren't huge differences. In analyzing different 10-year mortgages, you might wonder which index is better. It's important to know whether the loans you are considering have a higher initial adjustment cap. Some ten year loans have a higher initial adjustment cap, allowing the lender to raise the rate more for the first adjustment than at subsequent adjustments. Payment rate caps on 10/1 ARM mortgages are usually to a maximum of a 2% interest rate increase at time of adjustment, and to a maximum of 5% interest rate increase over the initial indexed rate over the life of the loan, though there are some 10-year mortgages which vary from this standard. It's important to know how the loan is structured, and how it's amortized during the initial 10-year period & beyond. Though you pay that initial indexed rate for the first five years of the life of the loan, the actual indexed rate of the loan can vary. Subsequent payments at time of adjustment will be based on the indexed rate at time of adjustment plus the fixed percentage amount, same as it was calculated for the initial indexed rate, but within whatever payment rate caps are specified by the loan terms. This amount added to the index is called the margin. The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination. The FHFA also publishes a Monthly Interest Rate Survey ( MIRS) which is used as an index by many lenders to reset interest rates. London Inter Bank Offering Rates (LIBOR).11th District Cost of Funds Index (COFI).
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