Posted by Mark (SDCA) on March 29, 1999 at 11:07:01:
COFI loans are adjustable loans tied to the Cost Of Funds Index (basically what the bank has to pay to get the money).
I like adjustables if I plan to exit the property soon (eg a rehab) and not keep the loan. If I plan on keeping the property, I prefer fixed loans. That way, I know what my mortgage expense will be. I just don’t like betting on the direction and magnitude of interest rate moves. As for whether taking over the payments is a good idea, it depends on what the current rate is, when and how much it will adjust next, what you plan on doing with the property.
Hope this helps,
No doubt this topic has been covered somewhere in the archives, but I’m curious what the subject-to-ers out there think of adjustable loans. Is it generally a poor idea to take over payments on these? If I were to go this route, I would probably be selling on a L/O and would be looking to get cashed out in something like a 4 year time frame, so were not talking about 30 year contract for deed or anything on the sell side. Opinions? By the way, the seller said this is a “coffee” loan (this is no doubt NOT the way to write this, since it’s probably some sort of acronym) What’s up with those? He said it has some sort of screwy index and does not follow the bond market in predictable ways all the time. Thanks in advance.
Hi Ray,
You’re kicking tires, aren’t you ? Good. I like knew ARMs (with exception of the B-loans for folks with bad credit), because they usually start at below market rates. I especially like FHA ARMs - they have the smallest annual cap of 1% and the smallest lifetime cap of 5%. All the other ones you got to really read and understand how they change and the caps. For example, I just took over $77K balance with $685 PITI (FHA ARM with 5% start rate, presently at 6%). Will sell L/O, 1000 down for 1000/mo with additional $300/mo pmts towards downpayment. That’s a nice 600/mo spread on a house purchased at FMV. It’ll go down in the next couple of years though. The key is to screen the buyers well to make sure they can exercise in 2-3 years.
Again, watch the starting rate, the index and the caps, and make your L/O short. I do have 1 longer term contract for deed where I essentially copied the terms of the underlying ARM note and gave myself a little interest bump. The buyer preferred that rather than having a short term balloon. This is one of the things Jim Piper referred to - if your payment goes up, so is Buyer’s.