COFI ARM Cost of Funds Index
The 11th District Cost of Funds is more prevalent in the West and the 1-Year
Treasury Security is more prevalent in the East. Buyers prefer the slowly
moving 11th District Cost of Funds and investors prefer the 1-Year Treasury
Security.
The monthly weighted average Eleventh District has been published by the
Federal Home Loan Bank of San Francisco since August 1981. Currently more
than one half of the savings institutions loans made in California are
tied to the 11th District Cost of Funds (COF) index.
The federal Home Loan Banks 11th District is comprised of saving institutions
in Arizona, California and Nevada.
Few people who use and follow the 11th District Cost of Funds understand
exactly how it is calculated, what it represents, how it moves and what
factors affect it.
The predecessor to the 11th District Cost of Funds index was the District
semiannual weighted average cost of funds published for a six month period
ending in June and December. The San Francisco Bank was the first Federal
Home Loan Bank to publish a monthly cost of funds index.
The funds used as a basis for the calculation of the 11th District Cost
of Funds index are the liabilities at the District savings institutions:
money on deposit at he institutions, money borrowed from a Federal Home
Loan Bank (known as advances) and all other money borrowed. The interest
paid on these types of funds is the cost of these funds.
The ratio of the dollar amount paid in interest during the month to the
average dollar amount of the funds for that month constitutes the weighted
average cost of funds ratio for that month.
The average cost of funds is said to be weighted because the three kinds
of funds and their costs are added together before a ratio is computed
rather than calculating averages individually for the three sources and
using a simple average of the three ratios. This gives the greatest weight
to the interest paid on deposits, and explains the delayed reaction of
the index to rising fixed-rate mortgages.
GPM Graduated Payment Mortgage
The GPM is another alternative to the conventional
adjustable rate mortgage, and is making a comeback as borrowers and mortgage
companies seek alternatives to assist in qualify for home financing
Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a
GPM the payments are usually fixed for one year at a time. Each year for
five years the payments graduate at 7.5% - 12.5% of the previous years
payment.
GPMs are available in 30 year and 15 year amortization, and for both conforming
and jumbo loans. With the graduated payments and a fixed note rate, GPMs
have scheduled negative amortization of approximately 10% - 12% of the
loan amount depending on the note rate. The higher the note rate the larger
degree of negative amortization. This compares to the possible negative
amortization of an monthly adjusting ARM of 10% of the loan amount. Both
loans give the consumer the ability to pay the additional principal and
avoid the negative amortization. In contrast, the GPM has a fixed payment
schedule so the additional principal payments reduce the term of the loan.
The ARMs additional payments avoid the negative amortization and the payments
decrease while the term of the loan remains constant.
The scheduled negative amortization on a GPM differs depending on the amortization
schedule, the note rate and the payment increases of the loan. GPM loans
with 7.5% annual payment increases offer the lowest qualifying rate but
the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization and a note rate of 10.50%
with 12.5% annual payment increases, the negative amortization continues
for 60 months. The qualifying rate is 5.75% and the negative amortization
is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally .5% to .75% higher than the note
rate of a straight fixed rate mortgage. The higher note rate and scheduled
negative amortization of the GPM makes the cost of the mortgage more expensive
to the borrower in the long run. In addition, the borrowers monthly payment
can increase by as much as 50% by the final payment adjustment.
The lower qualifying rate of the GPM can help borrowers maximize their
purchasing power, and can be useful in a market with rapid appreciation.
In markets where appreciation is moderate, and a borrower needs to move
during the scheduled negative amortization period they could create an
unpleasant situation.
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