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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127696  
Subject: Re: Adjustable Rate Question Date: 3/12/2001 10:40 PM
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Hi KFloyd,

Actually, what you refer to is known as the COFI Index. It stands for "Cost Of Funds Index" and it is calculated on a complicated financial formula, and is generally considered to be the slowest moving, most conservative of the adjustable indices.

No... the upwards adjustments you've experienced are not uncommon... and I'll explain why;

The COFI Arms are "lagging" moving averages... some of you who are into stock market technical analysis my know of what I speak.

A "Lagging Moving Average" follows along behind the upwards and downwards rolling of the markets. Imagine for a amoment a dog wandering on the beach back and forth between the water and the dunes as it runs northward (or southward... whatever.) Now imagine there's a 50 foot leash dragging behind the dog. It you had a big black marker attached to the end of the leash, you could look down from the sky and see 2 trails on the beach;
One trail of the dogs footprints,
Another trail from the marker on the end of the leash.

A "Lagging Moving Average" is the second trail. Since the interest rate markets had been so low 2 years ago, many folks who financed just a year ago or so saw the lower rates on the COFI Arms as a great bargain over the higher fixed rates. At the TIME, they WERE... BUT, when rates were to come back down again, the "end of the leash" was still whipping upwards towards the original trail of the higher interest rates.

So... when can you expect the COFI Arm rates to adjust back downwards? Well... theoretically it WILL eventually happen... and mathematically it MUST happen. My experience has been that rates will be forced down according to the competitive demands of the consumers versus the demands for higher rates from investors (lender investors, not stock investors.)

If you can bite the bullet and pony up the closing costs to lock in a rock-bottom low 30 year fixed rate while the gettin' is good, it may be the best time ever to do so. You ought to pencil out the monthly savings to see if they will be recouped within 3-5 years (assuming you intend to stay put that long). I wouldn't stay in the COFI Arm with the hoping that it will come back quickly enough to have your payments drop to catch up with where fixed rates are, however.

Need more help? Post me directly, or back at the boards.

All the best,
David Donhoff
Donhoff Development / Home Finance USA
Deltaforce@earthlink.net
425.823.1250 Phone
425.652.1001 Cell
815.846.2895 Fax
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