An Overview of Adjustable-Rate Mortgages, COFI loans, and Fraud
    Posted on 06/03/2022

Understanding ARM’s

An adjustable rate mortgage (typically called an ARM) is different from a fixed rate mortgage in that the interest rate of an ARM will periodically change rather than remain the same for the duration of a loan term. Because the beginning interest rates of ARM’s are lower than their fixed rate mortgage counterparts, borrowers like to consider an ARM if they plan to own the house for a short duration, expect an increased level of income, or cannot find a reasonable fixed rate mortgage interest rate.

Components of an ARM

Adjustable rate mortgages are comprised of four main components; a margin, index, interest rate cap structure, and initial interest rate period and/or adjustment period. The index is basically what lenders use in order to calculate changes to the interest rate. Some of the more commonly used indexes are the activities of one, three, and five-year securities (there are numerous indexes however).The margin of an ARM can be considered as a markup by the lender. In essence it is a kind of interest rate that signifies the cost of doing business as well as profit that the lender will make on the loan.  Both the margin and index rate are added together to gauge the final rate of interest. What the interest rate cap structure does is give a form of protection from big swings in the interest rate. In layman’s terms the cap structure limits the level that an interest rate can change within a year. The period of time between possible adjustments to the interest rate is known as the adjustment period.

Understanding COFI loans

A COFI loan (pronounced as coffee) is a specific type of adjustable rate mortgage that is based on the Cost of Funds Index. There are many advantages that a COFI mortgage offers such as flexible payment plans, low (introductory) rates, as well as being generally easy to qualify for if the borrower has good credit. Although there are several benefits to a COFI mortgage loan, there are some drawbacks to it as well. The majority of ARM’s, as stated above, have an interest rate cap structure that comes tied to them. COFI loans do not offer such protection for borrowers, so the interest rate can change according to the current mortgage industry climate. If a borrower has good credit though, COFI loans are a popular choice because of the tractability they offer in regards to payments and structuring.

AMR Fraud

Fraud in regards to adjustable rate mortgages is much like other forms of predatory lending in that it is usually committed by cunning industry professionals trying to dupe new and uninformed borrowers. One of the most common forms of AMR fraud has been when a dishonest broker guided borrowers in the direction of variable rate mortgages fully knowing that they (the borrowers) would have to refinance before the loan’s rates had readjusted. Many times this caused much difficulty for the borrower, in some cases not allowing them to refinance all while their monthly bills kept getting larger because of the variable rates. The easiest way to safeguard yourself from becoming a victim of predatory lending practices and AMR fraud is by remaining vigilant of any suspect activity or advice in the beginning stages of the lending process. A rule of thumb in the credit industry that would be wise to follow is that if a deal sounds too good to be true, than it most likely is.        

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