COFI ARM - COST OF FUNDS INDEX ADJUSTABLE RATE MORTGAGE

Thank you for your interest in COFI (Cost of Funds Index) Loans, sometimes known as
PREFERRED BANKER LOANS. These are special loans available only to persons with
excellent credit, sizeable down payments, and are located in selected property areas of
the United States. These loans have strict lending requirements, but are the best loans
in terms of savings available on the market today. They equal the interest savings of a
15-year mortgage with a 30-year payment.

These loans have a unique option of loaning yourself money by making monthly
payments set at a lower amount than required. The investors will allow this due to the
limited risk of lending to high quality, credit worthy persons that are responsible in
repaying their obligations to the creditors. Persons utilizing this option prefer to have the
equity in their bank account earning interest, instead of their home.

In order to understand how your interest rate is calculated, you need a little information
on the indexes used to determine the amount of interest due on your payments. The
11th District Cost of Funds Index (COFI), as reported by the Federal Home Loan Bank of
San Francisco, is an index that consists of a weighted average of what the 11th Treasury
District pays out in interest on: 1) passbook savings; 2) checking accounts; 3) money
market accounts; 4) CDs; and 5) borrowings from the Federal Reserve Banks.
The COFI is not an interest rate. Rather, it is an index used to determine interest
rate. Because deposits are the major funds component of the index, much of the interest
earnings come from rates paid on fixed rate deposits of long-term maturity at Savings &
Loan Institutions. The interest rate paid by an institution on such a deposit will not be
affected by changing market interest rates until the deposit matures. Consequently, the
cost of index does not move up and down as the market interest rates such as the Prime
Rate, Discount Rate or Treasury Bill yields.

What Are the Benefits to You?
Smart customers have used this program to wait out the interest rate cycle. Utilizing the
lower payments to maintain their mortgage position, tax write off on interest payments,
pay off higher interest credit cards, debts, car loans and, in addition, put the difference of
the payments into higher yielding profits, such as college funds or retirement accounts.
They understand that the loan will pay off in 18-23 years; they will have an account
almost equal to the value of their house, plus they will have the home completely paid off.
On a loan of $200,000 after 30 years, you would have an investment account worth
$329,000 @ 10% return. You will also save $148,008 in mortgages interest payments,
plus a house worth the minimum of $200,000 equaling a total of $677,000 in savings and
investments.

Only staying is your house for 5-7 years? On a short-term scenario, instead of having
the equity in your house, your equity will be in your investment account when you cash
out and sell your home.

On a standard 30 year fixed rate mortgage, you would have spent $515,817 in mortgage
payments and have a home worth a minimum of $200,000 equaling a total of $200,000.
You Tell Us, Which Makes Sense to You?

The COFI does not necessarily rise when other indexes rise. The COFI Index has
averaged 4.562% over the last 9 years. When the Federal Government raises the prime
interest rate, the banks do not necessarily do the same with the COFI — sometimes they
lower the indexes because of the influx of additional funds into a secure safe investment
such as Savings & Loan Institutions. These indexes are tied to what the banks pay to
their customers (greed driven index) rather than what is occurring on Wall Street
(government driven indexes).

In order for your COFI product to rise dramatically, it would literally take an Act of
Congress to remove the Federal Oversight Committee. This would allow Savings & Loan
free investment policies of their portfolios. Congress is not likely to allow a bail out of 4
billion dollars of FDIC funds to occur again: this is precisely what happened with the S&L
Bailout of 1992.

When you consider the amount of turmoil in the world over the last nine years, you will
start to understand how stable this index is compared to the Government Sponsored
Securities (Conventional Mortgages)

.
The world has seen the Gulf War, the Fall of the Soviet Union, The Crash of the
Japanese Economy, the NY Stock Market hit highs and lows, bailout of the Mexican
economy, famine, depression of economies, introduction of the Eurodollar and several
small international crisis’s which directly effected the prime rate and yet with all this
turmoil the COFI has remained stable, at an average of 4.562 for the last nine years,
which we cannot say about the Prime Rate.

Because the Government Oversight Committee has now regulated and stabilized the
S&L Industry, it is the securest form of investment we have in the United States. The
history of the COFI is extremely stable and has not INCREASED MORE THAN 1% A
YEAR FOR MORE THAN TWO YEARS IN A ROW in a regulated savings and loan
environment.

Are You Self-Employed or Do You Have Fluctuating Income?
Many of the programs have a fixed rate option, which allows them to convert their
existing mortgage for $200 to a fixed rate mortgage based on Fannie Mae current rates.
You can also request to recast or re-amortize your loan at any time for a fee of $200 as
long as your loan does not have any deferred interest due. That means you can pay the
fully indexed rate now. And, in the future, should there be a dramatic drop in income, you
can go back to the start rate and basically refinance your loan at the start rate in a new
mortgage balance.

The Deferred Interest Question: Should you make minimum payments only, you will
accrue deferred interest. Your loan balance will go up in exact proportion to the amount
of interest due that is not covered by the interest payment portion in your minimum
payment option. Essentially, you are loaning yourself money to invest and the
outstanding interest charge is rolled back into the loan. So instead of having equity in
your home, your equity will be in an investment. Your loan will still pay off in 18-23 years
on a bi-weekly payment. In its simplest form, the Preferred Banker Loan will save you
the same amount of interest fees as a 15 year mortgage but with a 30 year payment. *

The Mechanics of the Loan
Your Start Interest Rate will increase at the end of each year by 7.5% of the payment
($100 Payment will increase to $107.50) each year until your interest rate equals COFI
Index + Margin (the fully indexed rate).
Your rate will float at the stable index of the COFI plus your margin, but your payment will
reflect a change only once per year. An advantage to this is if the COFI goes down, any
extra funds in your payment will go directly against your principal until your payment is
adjusted for the lower payment on the yearly anniversary. A payment increase or
decrease of 7.5% (7.5% = approximately .875% in interest rate) of your payment will
remain in effect for the entire term of the loan. Dependent on the program, the lenders
will ask you if you want to recast your loan every 5 years for a better rate or to make sure
your payment will amortize your loan within the remaining max term of the loan.
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* Must be a Bi-Weekly Payment Program or Mortgage.
ARM INDEXES: 11th DISTRICT COFI LOANS
Full Name: Monthly Weighted Average Cost of Funds Index for Eleventh District
Savings Institutions
Sources: Federal Home Loan Bank of San Francisco (CA)
Compiled by: HSH Associates, Butler NJ
This index is used primarily for ARMs with monthly interest rate adjustments. The 11th
District represents the savings institutions (savings & loan associations and savings
banks) headquartered in Arizona, California and Nevada. The cost of funds reflects the
interest paid by institutions for savings accounts, FHLB advances, money borrowed from
commercial banks, and other sources.
Because the largest part of a cost of funds index is interest paid on savings accounts, this
index lags market interest rates. As a result; ARMs tied to this index rise (and fall) more
slowly than rates in general. However, such ARMs often have payment caps, but no
month-to-month interest rate caps.
Your new interest rate is usually determined by the index value 30 to 90 days before your
next rate change. A margin (usually between 3 percent and 4 percent) is added to this
index by the lender when your ARM’s rate is adjusted.
Please note that the 11th District COF index is a lagging index. That means the
index value for a particular month is not reported until the end of the next month. Thus,
the 11th COF index for the month of March is reported on the last business day of April;
the October value is reported on the last business day of November, etc. (The index
value is released after 3 PM Pacific time, or after 6 PM Eastern time).
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Note: This index was first calculated for the month of July 1981; the value available for earlier
years were extrapolated by the FHLB.
PAYMENT OPTIONS
With a COFI ARM, You Have Six (6) Payment Options
Option 11 - The minimum monthly payment gives you more cash flow now and keeps
your monthly payments manageable. This payment amount changes annually, but is
recalculated monthly on the outstanding balance. The 7.5% payment increase or
decrease limits how much your minimum payment can change.
Option 22 - You have an option to pay only the minimum plus any deferred interest that
month.
Option 33 - You have an option of paying a fully amortized payment, which is the fully
indexed rate. This is always available.
Option 44 - You have an option to have a bi-weekly payment or a fifteen year amortized
payment (dependent upon lender). This will build equity in your home and pay if off much
quicker.
Option 55 - You have an option to Recast or Re-amortize your loan at the start rate for
$250 (No deferred interest due).
Option 66 - You have an option to vonvert to a fixed rate mortgage at any time between
the 2nd through 7th Years of the loan.
Maximum Loan-to-Values
Self-employed-No Income/No asset Verification (NINA) = 25% Down
Salaried NINA = 20% Down
Full Documentation = 10% Down
1 Available with all investors
2 Available with all investors
3
Available with all investors
4
15 year payment available with all investors, Bi-Weekly Mortgage available in only certain areas of the
country. Bi-weekly Payment Programs are an after closing option available in all 50 states.
5
Available with all investors
6 Available with only one investor in certain areas of the country.

Cost of Funds Index Links

Cost of Funds Index Historical Data - COFI Index Historical Data

Cost of Funds Index - General Information

Cost of Funds Index FAQ - Frequenly Asked Questions (FAQ)

COFI Mortgage Program Guidelines