Is your home is financed with an adjustable rate mortgage (ARM)? Do you know what index your ARM is based on? If you don’t know, now would be a very good time to find out, because one of the two major indices that determines your monthly payment just took a huge spike upward — and the result for you could be significantly higher monthly mortgage payments.
If you recall from a previous blog post discussing ARMs, the rate that you pay on an ARM is comprised of two components: The margin and the index. Since the margin is generally fixed by the bank at the outset of the loan, variations in your payments will coincide with variations in the index. So depending on which index your ARM is based on, you have had a widely differing ride over the past few years. The two most widely used indices are the London Inter-Bank Offer Rate (LIBOR), or the 11th District Monthly Weighted Average Cost of Funds Index (COFI).
LIBOR rates spiked wildly during the credit crisis of 2008, but COFI has remained relatively flat to down. In fact, if you have a COFI-based ARM, you have probably seen your payments drop steadily over the past few years… but that is all about to change. Right at the end of last year, the bank that oversees COFI pushed up the rate up overnight by a whopping 66%! Some experts think this move could cause an increase of nearly 9% in some monthly mortgage payments. THAT’S a big deal.
Here’s a great article in WSJ.com that talks in more detail why this change happened, and what it means to the economy: COFI Jump Hits Some Homeowners.
So, keep an eye on your mailbox…because you might be getting an unwanted love letter from your lender…
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