Understanding Adjustable Rates
Many homeowners are noticing that they should get out of their adjustable rate mortgages and into a fixed rate to protect themselves and their families from increasing rates and payments on their adjustable rate mortgages. I highly recommend speaking with a mortgage professional that can guide you through your current scenario to determine if you are in a good situation or if you need to reanalyze your situation and make some changes to protect one of your largest investments, YOUR HOME!
I believe knowledge is power! Rather than turning a blind eye and not understanding what affects your adjustable rate mortgage payment, I encourage you to find out and stay aware! I'm sure many readers have noticed a difference in their wallets, due to increases in their payments from 1-2 years ago! Why? The indices listed above have been increasing! Being aware of what is occurring in the marketplace will enable you to make better financial decisions with one of your largest investments, YOUR HOME!
This isn't a scare tactic...It's reality! If you don't believe me...Wait for your adjustable rate mortgage to "readjust" to the new payment soon to see for yourself...
I think it's important to note that Adjustable Rate Mortgages serve a purpose if used properly. For example, if you only plan on being in the home for a short period of time and selling...An adjustable may make sense...But over the long haul...I'm not so sure...Are you?
Long-term 30 year fixed loans are very competitive to adjustable rates now and it's a great time to realign your goals and mortgage!
An adjustable rate mortgage has an "INDEX", which is the variable part of your mortgage and a "MARGIN", which is a predetermined constant. To get the "FULLY INDEXED RATE" you are currently paying on your mortgage, you should use the following formula:
Index (Variable) + Margin (Predetermined Constant) = Your "Fully Indexed Rate"
I am going to give an explanation of what each index is, so borrowers can understand the dynamics affecting their adjustable rate mortgages.
COFI- The 11th District Cost of Funds Index is the weighted average of the cost of borrowings (funds) to member banking institutions of the Federal Home Loan Bank of San Francisco (the 11th District). The index rate tends to lag market interest rate adjustments and is relatively stable because institutions borrow money for varying terms and do not pay market rates for all of their funds. For example, institutions most commonly borrow from depositors in the form of certificates of deposit (cd's) The terms on cd's vary from several days to several years and the interest rates paid were determined at the time of the deposit. This index is reported monthly. However, thereported rate generally lags behind 2 months. Example: January's index is reported in March and February's index is reported in April.
12 Month MTA- This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year. In plain English, this index is calculated by averaging the previous 12 rates of the 1-Year CMT. Because this particular index is an annual average, it is steadier than the 1 Year Treasury Index. It fluctuates slightly more than the 11th District Cost of Funds, although its movements track each other very closely. This rate is updated after the Federal Reserve releases its data on the first Monday of each month.
CODI-This index is the 12 month average of the monthly average yields of 3 month certificates of deposit. In plain English, this index is calculated by averaging the previous 12 rates of the 3 month CD rate. The 3 month CD rate used is the rate published by the Federal Reserve. Because this particular index is an annual average, it is more steady than straight CD rates. It is important to note that some banks use their own CODI's, which will be different from investor to investor. This rate is updated after the Federal Reserve releases its data on the first Monday of each month.)
COSI-This index is the weighted annualized average of all interest rates in effect on World Savings deposit accounts on the last day of each month. This index is specific to the banking institutions operated under the World Savings name by its holding company, Golden West Financial Corporation. The rate is adjusted for the effects of financial instruments related to deposit accounts and other adjustments determined by Golden West in its sole discretion to accurately reflect the weighted average of interest rates on the deposit accounts. This index is basically reflective of the rate World Savings is paying for its deposits. Updated each month based upon availability of data from World Savings.
CMT(1 Year Constant Maturity Treasury Rate)-This index is an average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board. Yields are interpolated by the United States Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity, is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. Updated after the Federal Reserve releases its data on the first Monday of each month.
1 Year LIBOR- LIBOR stands for "London Inter-Bank Offered Rate." It is based on rates that contributor banks in London offer each other for inter-bank deposits. From a bank's perspective, deposits are simply funds that are loaned to them. So in effect, a LIBOR is a rate which a fellow London bank can borrow money from other banks. Rate calculations are complex as they incorporate variables such as time, maturity and currency rates. There are hundreds of LIBOR rates reported each month in numerous currencies. We only report the 1 year LIBOR as published by Fannie Mae. This is a LIBOR for one year deposits in U.S. Dollars during a given month. Updated monthly.
6 Month LIBOR-See notes on 1 year LIBOR above. I will only report the 6 month LIBOR as published by Fannie Mae. This is a LIBOR for a 6 month deposit in U.S. Dollars during a given month. This index is updated monthly.
1 Month LIBOR- See notes on 1 year LIBOR. I will only report the 1 month LIBOR published by Fannie Mae. This is the LIBOR for a one month deposit in U.S. Dollars during a given month. This index is updated monthly.
Prime Rate-The Prime Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business owners). The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks at the same time; although, the prime rate does not adjust on a regular basis. The rates reported are based on the prime rates on the first day of each respective month. It is important to not that most Home Equity Lines of Credit are tied to the Prime Rate!
Now you should be asking yourself 1 very important question!
Which index rate(s) above is/are affecting my mortgage payment?
Answer: Here is how you find out! Within your original loan documents, there are two documents you specifically need to look for:
Your Promissory Note
Your Adjustable Rate Rider
By looking at these documents, you will be able to find out which index you are tied to.
Give me a call on your California Mortgage. We'll go through your individual scenario and see if we can make some positive changes with YOUR best interests in mind!
Oak Valley Mortgage
2006 Chico Assoc. of Realtors Affiliate Chairman
"You find the perfect home, we'll find the perfect loan!"