Loan Questions - Interest Only Loans, LIBOR Loans, Mortgages and more

London Inter Bank Offering Rate (LIBOR) is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. London is the center of the Euromarket in terms of volume. The LIBOR is an international index which follows the world economic condition. It allows international investors to match their cost of lending to their cost of funds. There are several different LIBOR rates widely used as ARM indexes: 1-, 3-, 6- Month, and 1-Year LIBOR. The 6-Month LIBOR is the most common.

“Interest Only” Adjustable Rate Mortgages (ARMs) have become extremely popular and effective tools for helping prospective homebuyers achieve their dream of homeownership, it also allows for current homeowners to drastically reduce their monthy payments.“Interest Only” ARMs can be an excellent choice of financing under certain conditions, such as rising income expectations, high interest rates, and short-term homeownership. Below are the four items that are normally associated with each arm products.

• Initial interest rate, which is typically one to three percentage points lower than that of most fixed rate mortgages. Lower interest rates and the popularity of the “Interest Only” option make ARM’s easier to qualify for consumers. The initial interest rate is tied to certain economic indicators that dictate in part what the monthly payments will be.

• Adjustment interval, at the time between changes in the interest rate and/or monthly payment will be.

• Index, against which lenders measure the difference between what they are making on their investment in the mortgage and what they could be making on other types of investments. The most popular index has been the one- year Treasury bill (also called T-bill). The Libor index is becoming more popular as the margin on most of these products are lower than most T-bill ARM’s

• Margin, this is what the lender adds to the index to establish the adjusted interest rate on an ARM. The margin is usually 1.75 to 2.00 percent on the Libor and 2.25 to 2.75 percent on the T-bill. Keep in mind the margin is the most important aspect of short term Interest Only ARM’s like the 1 month and 6 month Libor products. ARM’s usually contains certain consumer safeguards such as caps, which limit the amount that the interest rate can go up or down within the adjustment period. For instance, a typical ARM would have a 1st adjustment cap of two percentage points and a lifetime cap of normally 5 to 6 percent over the start rate. This means that a loan with an initial interest rate of 4.75% for the 1st 5 years would be able to go no higher than 9.75 percent over the life of the loan with a 5% lifetime cap. Most short term Libor ARM’s like the 1 month and 6 month do not period caps but do have lifetime caps, these caps vary from lender to lender.

Other options you should ask about when shopping for an ARM are:

• Assumability, or whether you may transfer the mortgage to a new homebuyer, usually with the same terms if the new homebuyer qualifies for the loan. ARMs are almost always assumable.

• Convertibility allows the borrower to change an ARM to a fixed rate mortgage, usually at the end of some predetermined period, locking in a lower interest rate.

Q. WHAT IS THE MTA INDEX? ( Top )

A. The Monthly Treasury Average is a relatively new ARM index. 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. It is calculated by averaging the previous 12 monthly values of the 1-Year CMT. Because this index is an annual average, it is more steady than the 1-Year CMT index. The MTA index generally fluctuates slightly more than the 11th District COFI, although its movements track each other very closely. This index is normally used with "Option ARM" products that allow for consumers to make four different payment options.

MTA INDEX FROM JANUARY 02 THRU PRESENT
	2002	2003	2004	2005	2006	2007
Jan	3.260	1.935	1.234	2.022	3.751	4.983
Feb	3.056	1.858	1.229	2.171	3.888	5.014
Mar	2.912	1.747	1.225	2.347	4.010	5.027
Apr	2.787	1.646	1.238	2.504	4.143	5.029
May	2.668	1.548	1.288	2.633	4.282	5.022
Jun	2.553	1.449	1.381	2.737	4.432	5.005
Jul	2.414	1.379	1.463	2.865	4.583	4.983
Aug	2.272	1.342	1.522	3.019	4.664	4.933
Sep	2.180	1.302	1.595	3.163	4.758	4.863
Oct	2.123	1.268	1.677	3.326	4.827	4.788
Nov	2.066	1.256	1.773	3.478	4.883
Dec	2.022	1.244	1.887	3.613	4.933

Q. HOW DOES THE TREASURY INDEX WORK? ( Top )

A. These indexes are based on the results of auctions that the U.S. Treasury holds for its Treasury bills, notes and bonds. Treasury bills are issued by the U.S. government with maturities of 3, 6 months, and 1 year in order to pay for the national debt and other expenses. ARMs tied to the 3-, 6-Mo, and 1Yr T-Bills usually adjust once every six months, once each year, or once every three years accordingly. The 1 year Treasury Bill index (1-year T-Bill) is the most commonly used index for traditional ARM products that amortize. It is also become widely used with longer term "Interest Only" ARM products like the 3,5,7 & 10/1 ARM's.


Q. WHAT IS THE COFI INDEX? ( Top )

A .What is the 11th District Cost of Funds Index? The Federal Home Loan Bank (FHLB) System is comprised of 12 Districts, each of which has its own District Bank-The 11th District is based in San Francisco and includes member savings institutions from Arizona, California and Nevada. The 11th District COFI was introduced in 1981 and represents the weighted average cost of all funds for savings institutions eligible to be members of the 11th District. The source of these funds includes savings and checking accounts, money market accounts, short term CD accounts, advances by the FHLB District Bank, and other borrowed money. The latest statistics released by the Federal Home Loan Bank Board (FHLBB) show the following approximations:

- 60% of deposits are in Checking and Savings accounts
- 30% of deposits are in the 6 month and 1 year CDs
- 10% of deposits are in 2 to 5 year CDs

The index represents a weighted average cost of funds and includes long-term accounts-The 11th District COFI is popular with both thrift lenders and borrowers because the index adjusts slowly and stays consistent with those lenders' costs.

Q. What is the CODI Index? ( Top )

A. CODI - Certificate of Deposit Index. A CODI loan is based on one of the most stable indexes currently available. Simply put, it is the aggregate sum of what banks are paying to their depositors on their 3-month CD accounts! As we all know, these short-term CDs generally offer a very low rate of return. Currently, the average rate paid by a bank on a 3-month CD is approximately 1.40%. The overall index is calculated by using an average, of an average, of an average. It works this way: they take the daily average of these 3-month CDs and add those daily values together for one month. They then divide that sum by the number of days in the month to reach a monthly value. Next, they add that current monthly value to the previous 11 monthly values and divide by 12 to give us the current CODI Index.

CODI - Certificate of Deposit Index