[quote=flu]Mind if I ask what the terms of the loan are?[/quote]
Not at all, flu, but I seriously doubt similar loans are available today, which is a shame.
It is adjusted monthly to the Federal Home Loan Bank Board (FHLBB) Cost of Funds Index. In this region, the index is referred to as the 11th District COFI. The 11th District of the FHLBB is based in San Francisco. The margin is 2.75% with annual cap of 2% and a life cap of 10.5% (I have never paid over 7.1%) There are no points or orgination fees. It has a $300 appraisal fee, $150 doc drawing fee, ALTA (lender’s title) premium, 1/2 escrow fee, tax and ins. prorations and recording fees. My closing costs at orgination for this last (purchase $$ COFI) were $2,800. I had a one-month “teaser rate” of 2.4%.
Former COFI loans I had featured a 2.4% margin, a 3 month teaser rate of 2.5%, a 1.75% annual cap and a 10.75% or 12.5% life cap. Believe it or not, these loans were actually a better deal than my current loan. Here, I never paid more than 7.7% but the longest I held one was four years.
All are fully amortizing for 30 years. As far as I know, there were no 15-year loans in this program but you can check a box on the monthly coupon to indicate how much extra principal you wish to send in that month. There are no balloon payments, alienation clauses or prepayment penalties.
The reason most borrowers got into trouble with Option ARMS is because they were ignorant, greedy or betting that RE would continue to climb in value (and they could unload it easily) or all three. Most made their payment according to one or both of the first two options on their monthly coupon.
Option 1: Minimum payment, which does not cover any principal OR even all of the interest you owe;
Option 2: Interest only, which does not cover any principal;
Option 3: The fully amortizing rate;
Option 4: Any additional principal you wish to pay (must be in combination with option 3, without any past deferred interest on the loan)
If a borrower was stupid enough to use Options 1 and/or 2 or a combination thereof, at the 61st month, the new minimum payment could reset MUCH HIGHER, depending on how much principle and/or interest they chose to defer.
Recasting begins the 61st month and every 12th month after that. If the borrower has ONLY been making Option 3 payments, as I have, the recast works in their favor. If the borrower has any deferred principle or interest at the time of recast, it works in the lender’s favor. If a borrower frequently adds Option 4 payments to Option 3, the annual recast WILL SIGNIFICANTLY work in their favor.
Under no circumstances can a borrower amass a debt of more than 125% of the original loan without an automatic reset. Options 1 and 2 disappear at the 61st month and the loan becomes fully amortizing.
I can’t tell you how many months my interest rate has been lower than the prevailing “30-yr. fixed rate” but it is many more months than it has been higher.
Given that it’s fully assumable, has low origination costs and has no prepayment penalty, it’s also an awesome purchase $$ loan for a flipper.
In a high interest-rate environment (the likes of which we haven’t seen since 1983) all bets are off. If this happened, the interest rate would begin escalating with little or no warning up to 2% each calendar year until its 10.5% cap is reached but the loan would continue to fully amortize. In any case, I have 21 years left of this loan.
I forgot to add that this loan product was typically originated by giant thrifts backed by the FSLIC, such as Great American Savings, Downey Savings, World Savings, Great Western Bank, Security Pacific Bank and Washington Mutual, all who employed their own in-house loan officers and appraisers (the law has since changed on appraisers). What few 11th District COFI loans are still left (and performing) are now serviced by Downey, World and Chase. All have remained 100% within the portfolio of the banks. Some are backed by Fannie Mae and others by Freddie Mac. Others are pure portfolio loans. A borrower has the option of walking up to a any teller by the 15th of the month and paying in person and the payment is not late.
