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Indexes
& Margins
Part
1
There’s
a host of indexes and even more margins. Let’s
break ‘em down and make understanding them simple, by setting some easy,
understandable rules. Indexes
change monthly, and have values they are based on. For
example, the LIBOR index (London Inter-Bank Offered Rate) is based upon the
interest rates London’s top banks charge each other for short term financing. This
is a highly volatile index, and is one of the quickest to react to market
conditions, up or down. Margins
– once they are set – remain the same for the life of the loan. Indexes
and margins are always referred to and known as percentages, even if not
specifically stated. Most
commonly, margins on mortgages will run between 1.75 and 3.25. Indexes
are the bare cost of a loan; margin is the lender’s gross profit. “Fully
indexed”, refers to the index and margin being added together which, more
importantly, is the interest rate being charged on the loan, (after the initial
“teaser rate.”) One
of the most commonly known indexes is the “Prime Rate.” Let’s
use the prime rate as an example, since a little later I will tell you about a
great deal your mortgage broker, or mortgage banker can help you with, that’s
tied to the prime rate. The
prime rate right now is nine and one half percent. It’s a moving target,
especially of late due to the Fed.’s efforts to cool the economy. Interestingly,
the prime rate was at its all-time low in 1933 and 1947, at 1.50, and at an all
time high of 21.50 in 1981. The
prime rate is commonly associated with car loans, home equity lines, and
construction loans. Loosely,
if you are a good paying customer, you will pay the current prime rate plus a
margin of one to two percent for these loans. Some
of the more common mortgage indexes are; the 12 – Month Treasury Average
(12-mo. MTA); the 12 – Month Treasury Bill (12-mo. T-Bill); the Eleventh
District Cost-of-Funds (COFI); and Cost-of-Savings Index (COSI). The
slowest moving of these are the MTA, COFI and COSI. In
a market where interest rates are going up quickly, as in today’s market, one
would benefit to choose one of the slower moving indexes. The
fully indexed rate remains lower, longer, keeping your monthly mortgage payment
lower, for a longer period of time. Compare
the indexes on the lowest three. ·
MTA –
5.703 ·
COFI –
5.196 ·
COSI –
5.110 COSI has the lowest index. Paying zero points, compare the lowest margin. ·
MTA –
1.625 ·
COFI –
2.85 ·
COSI –
3.15 MTA
has the lowest margin, and even though the MTA index is higher, the lowest fully
indexed rate is still the MTA. This
is an example only. Because indexes change, and margins vary from program to
program, careful consideration should be given at the time you are ready for
your loan. Now
for that great deal I mentioned earlier. An
unusually good equity-line is being offered through Chase Manhattan Bank, USA.
You can go direct, or you can go through your favorite mortgage broker, or
mortgage banker. Regardless, the terms are the same. The
wonderful thing about this equity-line is that the margin is zero! Nearly
as wonderful are no closing-costs! Here
are the basics to qualify: ·
Minimum
line of $40,00 to pay off existing debt ·
720 +
FICO credit score It
comes with a checkbook and credit card that draws against your line-of-credit,
and has a $20 annual fee. Even
better is an equity line offered through North American Mortgage. The terms are
nearly identical, but you do not have to pay off debt with North American as you
do with Chase. You cannot put the North American equity line behind a negative
amortization first mortgage. Neither
of the two equity lines have a pre-payment penalty. Call
your favorite mortgage broker, or banker for more details about these two
excellent equity lines!
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