Life used to be simple. You gave the bank money -- they gave you 3.5% interest. You borrowed money -- they charged you 6%. Then things got complicated. In the early '80's interest rates skyrocketed and the rapid fluctuation in rates led to a sensible concept. Lenders said, "We'll give you a better rate now if you take the risk that as the cost of funds to us increases we can pass the increase along to you. If rates go down we'll lower your rate."
The advantage is lower rates now. The disadvantage is uncertainty.
Since the rates are lower adjustable rate loans are easier to qualify for. Often, for the first time buyer, they are the only alternative.
There are several parameters regarding variable rate loans:
1 Year T-Bill
PROPER NAME: Yield on Treasury Security Adjusted to a Constant Maturity of One Year
The One-Year Treasury Security index (or "T-Sec") is associated with ARMs that feature annual rate adjustments. It is calculated by the Federal Reserve Board and has both a weekly and monthly value; most lenders use the weekly value. This index reflects the state of the economy, and responds quickly to economic changes.
Confusion can arise when some lenders use the term "one year Treasury bill." Most one-year ARMs -- but not all -- are tied to the Constant Maturity of the One Year Treasury Security.
This index is available on a recording at (415) 974-2859
If you have a loan you are interested in refinancing you can generally find the details (Index, Margin and life cap) by looking in paragraph #4 of the "Adjustable Rate Note" or "Adjustable Rate Rider". This will be with the papers you received from the escrow company.
LIBOR
Stands for London Interbank Offered Rate. It is a measure of commercial lending rates of a group of London banks. It is similar to Prime. It moved up and down rapidly. It can best be obtained daily from the Wall Street Journal.
6 Mos. CD
This is a measure of what banks are paying on 6 month certificates of deposit. It moves less rapidly than LIBOR or T-bill but more rapidly than COFI.
COFI or 11th District Cost of Funds. (not common)
PROPER NAME: Monthly Weighted Average Cost of Funds for 11th District SAIF-Insured Institutions.
This index, used primarily for ARMs with monthly interest rate adjustments, is calculated by the Federal Home Loan Bank of San Francisco. The 11th District represents the SAIF-insured savings institutions (savings & loan associations and savings banks) in Arizona, California and Nevada.
The cost of funds reflects the interest rates paid by institutions for savings accounts, FHLB advances, money borrowed from commercial banks, and other sources.
Since the largest part of a cost of funds index is interest paid on savings accounts, this index lags behind the economy. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general. However, such ARMs often have payment caps, but no month-to-month interest rate caps.
This index is available by calling (415)616-2600. The value changes once a month and is published at 3 P.M. on the last day of each month.
33 Wentworth Ave E, St Paul, MN 55118
(651) 552-3681
Joe@JoeMetzler.com
Cambria Mortgage
NMLS# 322798
Joe Metzler Loan Officer
NMLS# 274132. License MN #MLO-274132, WI #11418. SD #MLO.03095, ND #NDMLO274132, IA #36175
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Equal Housing Lender, Cambria Mortgage NMLS# 322798. We lend in: Minnesota, Wisconsin, Iowa, Colorado, Florida, North Dakota, South Dakota, and Texas. This is not an offer to lend or to extend credit, nor is this a guaranty of loan approval or commitment to lend. The information here may not be up-to-date and may no longer be accurate. Products and interest rates are subject to change at any time due to changing market conditions. Not all programs available in all states. Actual rates available to you may vary based upon a number of factors. Consumers must independently verify the accuracy and currency of available mortgage programs. All loan approvals are subject to the borrower(s) satisfying all underwriting guidelines and loan approval conditions and providing an acceptable property, appraisal and title report. © 1998 - 2020, Joe Metzler, NMLS 274132