How to choose between COFI and LIBOR indexed ARM?


LIBOR and COFI indexed ARMs can be very different in nature because of the totally different nature of the underlying ARM index. On the whole, LIBOR-indexed ARM home loans are more often Interest-Only loans, while a COFI-indexed ARM mortgage is usually Option ARM and allows for negative amortization.

LIBOR Indexed ARM Loans Features

It is not that LIBOR doesn't allow for a Neg Am loan; rather, lenders structure LIBOR loans as ones with and without possibility of negative amortization.

For example, a 1- and 6- Month LIBOR ARM can have a 1% start rate for below 80% LTV loans, or 3.5% start rate for loans with LTV over 90%. With Neg Am the margin can be between 1% and 3.5% and usually can be bought down to 0.75%.

Interest-Only period of up to 10 years may become available for LIBOR ARMs, avoiding deferred interest, with the recast based only on the interest rate and the outstanding balance of the principal. The terms described above will vary among lenders and will depend on your LTV, credit score, whether you are buying a primary residence, a second home or investment property

1-, 3-, 6-Month and 1-, 2-, 3-, 5-, 7- and 10-Year LIBOR ARMs with and without negative amortization are available on the market. LIBOR ARMs will have periodic and lifetime interest rate cap to protect consumers.

COFI Based ARM Home Loans

COFI indexed ARMs can also have as low as 1% starting rate, but the margin can be higher - from 1.5% to 4.5% - and COFI ARMs don't usually have periodic adjustment caps. COFI-indexed ARM loans usually are Option ARMs with a variety of payment options. Borrowers may make a minimum, an interest-only, or a fully amortizing monthly payment - whichever they like whenever they like it.

One way to benefit from a COFI-indexed adjustable rate mortgage is to make minimum payments throughout the year, and they could decide how much interest to pay in a lump sum at the end of the year to maximize their tax deductions.

Conclusion on COFI and LIBOR Indexed ARM Loans

On the whole, rates are comparable for both, but COFI loans provide greater flexibility and less protection for consumers. Investors prefer COFI loans at large, as they allow for cash flow maximization. If you are a homeowner, looking for greater stability and are uninterested in the COFI ARMs exotic features, you should stay with a LIBOR-based ARM loan.

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