California Refinance Decision Goes from Maybe to Must

A California refinance decision dumping an adjustable rate loan in favor of a fixed rate loan, goes from a maybe to a must. The popular California refinance choice made by many, the Option ARM, continues to rise.

As you may know, the COFI (pronounced “coffee”) Index refers to the 11th District Cost Of Funds and it is the index of choice for those adjustable rate loans that adjust monthly and quarterly, the same loan most used for a California refinance.

The 11th Federal Home Loan District represents the savings banks in California, Arizona and Nevada…the same lending institutions that pioneered the Option ARM in the first place. The biggest originators and holders of these dangerous loans are Washington Mutual, Countrywide Home Loans, World Savings, and Downey Savings..all big California refinance lenders.

The COFI Index reflects the rate savings accounts earn depositors in the 11th District. So the rise in the August number was probably a reflection of the credit crunch where the banks needed more money so they upped the rates on savings accounts as the incentive. This may be a trend that will continue since the credit crunch liquidity crisis is far from over. Even with the more recent Fed Funds rate reduction, the fear is inflation would skyrocket, so once again the savings rate must be increased to encourage depositors to put money into savings accounts.

Since the cost of funds index is set by the underlying interest paid to depositors on savings accounts, the COFI is always a full month behind market interest rates. So we are just now on the first of October getting the end of August figure. This lagging feature is used to sell the Option ARM as if that’s some form of benefit.

It isn’t.

Unless you call getting hit in the back of the head with a bat 2 months down the road instead of today a benefit.

You MUST and I repeat MUST refinance away from your COFI Indexed ARM as soon as possible, especially if you live in California, Arizona, or Nevada not only because of rising rates but also because home values in those states are dropping rapidly and the loss of equity could hurt your ability to get approved.

Do it now…do not “pass Go” or “collect $200″…find yourself an ethical broker (don’t know how?…check our our system for doing just that here) and get it done while your house will still appraise.

Good Luck!

Author: Rob K. Blake
Published November 30, 2007