financing secrets of a millionaire real estate investor.pdf

4/Working with Lenders 47
index is an outside source that can be determined by formulas, such
as the following:
• LIBOR (London Interbank Offered Rate)—based on the interest
rate at which international banks lend and borrow funds in the
London Interbank market.
• COFI (Cost of Funds Index)—based on the 11th District’s Federal
Home Loan Bank of San Francisco. These loans often
adjust on a monthly basis, which can make bookkeeping a real
headache!
• T-bills Index—based on average rates the Federal government
pays on U.S. treasury bills. Also known as the Treasury Constant
Maturity, or TCM.
• CD Index (certificate of deposit)—based on average rates
banks are paying on six-month CDs.
The index you choose will affect how long your rate is fixed for
and the chances that your interest rate will increase. Which one is
best Because that depends on what is going on in the national and
world economy, you have to review your short-term and long-term
goals with your lender before choosing an index.
ARMs are very common in the subprime market and with portfolio
lenders, but they can be very risky because of the uncertainty of
future interest rates. However, like a balloon mortgage, an ARM can
be used effectively with a little common sense. If you plan to sell or
refinance the property within a few years, then an ARM may make
sense.