FURTHER EXPLANATION OF PAYMENT OPTIONS

MINIMUM MONTHLY PAYMENT: Pay the Minimum amount due, which mayl result in some Interest being deferred (or added onto your principal) in the early years of your mortgage. The initial "Start Rate" is not a Principal and Interest Rate. The purpose of the low Starting Rate, is to "establish" what the Minimum payments will be for the first year. You will be allowed to continue making the Minimum payment for 12 months, but you may not be paying all the Interest due every month, and you could therefore be acquiring deferred interest (negative amortization). Starting with the 1st day of your new COFI, COSI, MTA, LIBOR or CODI mortgage, your loan balance is going to be re-amortized every month, based upon the "Fully Indexed" rate (Index + Margin). Therefore on day one (1), the interest rate adjusts to what is known as the "Fully Indexed" Rate or the Index + Margin. If you continue just making Minimum Payments for the next 12 months, beginning in year 2, your minimum payment may increase by the 7.5% payment cap. If you still continue to make only the Minimum payment, every year (on your anniversary date) this minimum payment may increase by the 7.5% payment cap. This payment increase helps to slow down the interest you are deferring every year. Eventually, the Minimum payment option will disappear and you will now be making the "Scheduled" payment (or the payment that will be based upon your then outstanding loan balance or the fully indexed payment, to still pay your mortgage off in full for the remaining years left on your mortgage).The Minimum payments are only guaranteed for the 1st five years of your mortgage (unless you hit the maximum amount you are allowed to defer -- which varies from lender to lender -- at which time your loan would be recast to enable you to pay down the principal and you may therefore lose this option).

INTEREST ONLY PAYMENT - The Interest Only payment is based on the "fully indexed rate". The fully indexed rate is determined by adding your margin to the previous month's index. For example, if your margin is 2.900% and the current index is 1.00%, then your fully indexed rate would be 3.900% for that month. This fully indexed rate may change a little every month depending on the change in the index. Some lenders may round this fully indexed rate to the nearest 1/8 percent. Typically, this payment is based on the outstanding principal balance (check this with your loan officer to see if it applies to your loan).

Pay full Principal & Interest ("Scheduled" payment) amount to fully amortize your loan according to the original term. The fully Indexed Rate, is the monthly Principal and Interest (P.I.) due. It is achieved by adding the margin to the current COFI/COSI/MTA/CODI/LIBOR index. The Margin never changes for the life of your mortgage. The Index changes every month after the initial Start Rate period. If you always pay the fully indexed rate, you will never have deferred interest (negative amortization), and the 7.5% yearly payment increases will not necessarily come into play.

15 year payment will also be reflected on your monthly statement. If you choose this option every month, you will pay off your loan in 15 years.

Pay any amount extra over the Minimum amount due. - i.e., even if you elect to have a pre-payment penalty (you may opt out of a prepayment penalty by paying points -- this varies from program to program and may also be dependent on loan size), you are still allowed to pre-pay (lump-in) up to 20% of the original loan balance, plus your normal P&I for the first three years of your loan without incurring a penalty. After this pre-payment period (the length of prepayment may vary from program to program), you can pay the loan off in full if you like. If you don't have a pre-payment penalty, you can lump-in any extra amount, at any time, and pay your loan off in full after either one month, one year, etc.

What does COFI, MTA, CODI, LIBOR and COSI stand for?

COFI - Cost of Funds Index - What is the 11th District Cost of Funds Index? The Federal Home Loan Bank (FHLB) System is comprised of 12 Districts, each of which has its own District Bank-The 11th District is based in San Francisco and includes member savings institutions from Arizona, California and Nevada. The 11th District COFI was introduced in 1981 and represents the weighted average cost of all funds for savings institutions eligible to be members of the 11th District. The source of these funds includes savings and checking accounts, money market accounts, short term CD accounts, advances by the FHLB District Bank, and other borrowed money. The latest statistics released by the Federal Home Loan Bank Board (FHLBB) show the following approximations:

• 60% of deposits are in Checking and Savings accounts
• 30% of deposits are in the 6 month and 1 year CDs
• 10% of deposits are in 2 to 5 year CDs

The index represents a weighted average cost of funds and includes long-term accounts-The 11th District COFI is popular with both thrift lenders and borrowers because the index adjusts slowly and stays consistent with those lenders' costs. The most recent index value may be obtained by calling the FHLB Hot line for the 11th District COFI at (415) 616-2600 or by checking the money section of your USA Today.

Why is COFI so stable? History of COFI In 1977, Congress thought it would be a bright idea to deregulate the banking industry, resulting in a rash of speculative lending practices. Among these were wholesale investment in junk bonds, foreign governments and many varieties of commercial real estate ventures. These investments yielded high returns but were of very high risk. Banks were taking our money and investing it. Due to the liberal banking laws, little banks were popping up all over the place competing for our money. This competition drove the banks cost of funds up. They didn't really care though! They were happy to take our money so they could invest it elsewhere for a higher return. This caused a myriad of problems as people jumped out of the equity markets and into banks. Bank deposits are FDIC insured and gave higher comfort to the general public. As a result of all this, the 11th District Cost of Funds Index increased as the banking industry jumped down the path of no return. In 1989, Congress got a hold of themselves and re-regulated the banking industry with the passing of a law called FIRREA (Federal Institutions Reform Recovery Enforcement Act.) The government also created an entity call the RTC whose job description included the liquidation of the failing banks and S&Ls. There are now few high cost thrifts and funds and no competition between the banks. Less competition means banks are going to pay us less for our money. Less competition means COFI drops!

Banks are now unable to invest in the same avenues as before due to strict regulation. The FDIC keeps these rates from going too high.

COFI is an average - The COFI is a weighted average of approximately $350 billion in assets. Because it is an average, it doesn't move very fast. This protects the interest rate of a COFI loan from fluctuating quickly.

COFI does not move with other indexes - The Cost of Funds Index loan is not market dependent. In 1994, the Federal Reserve raised rates (7) times. This resulted in the Prime Rate, one year T-Bill and other indexes going up over 3% in a one year period. COFI stays low because it is the cost for a bank to do business! Anyone who has had a savings, money market or interest-bearing savings account knows that those rates are low and move very very slowly. The COFI is calculated at the end of every month for the previous month, so it lags the overall market. The COFI's slow, lagging pace benefits borrowers when rates are rising, but not when rates are falling. Therefore, as rates continue their upward trend, the COFI should be looked at more closely due to it's stability as an index.

COSI - cost of savings index. Similar to COFI except it is one particular Bank's own deposit accounts. This Lender borrows money from consumers in the form of deposits, i.e. C/D's, checking and savings accounts, and then lends the money out as home mortgages. Then they place a fixed "Margin" on top of their own Index. The interest rates in effect on these deposits are the basis for the COSI. The COSI is not based on actual interest paid on deposit accounts, but rather on a weighted annualized rate of all interest rates in effect on deposit accounts as of the last day of each month.

MTA - 12-Month Treasury Average Index. This index is based on the average annual monthly yields of U.S. Treasury Securities, (T-Bill) adjusted to a constant maturity of one year, as made available by the Federal Reserve. The index is determined by adding together the monthly yields for the most recent 12 months and dividing by 12. Since it?s an average, higher yields in some months are offset by lower yields in others. It?s considered another sound choice for home investment, since interest rate increases take longer to affect the 12-MTA than other ARM indices.

CODI - Certificate of Deposit Index. A CODI loan is based on one of the most stable indexes currently available. Simply put, it is the aggregate sum of what banks are paying to their depositors on their 3-month CD accounts! As we all know, these short-term CDs generally offer a very low rate of return. Currently, the average rate paid by a bank on a 3-month CD is approximately 1.40%. The overall index is calculated by using an average, of an average, of an average. It works this way: they take the daily average of these 3-month CDs and add those daily values together for one month. They then divide that sum by the number of days in the month to reach a monthly value. Next, they add that current monthly value to the previous 11 monthly values and divide by 12 to guve us the current CODI Index. So, will the banks raise the rate they PAY to customers anytime soon? Obviously, they won't. Due to the lack of competition between banks (notice how there are only maybe 10 banks in your area), they know you have to put your money somewhere. Without competition, they know that they have an excellent chance that they will get your deposit, therefore, they do not have to offer any incentive (i.e. higher rate of return) to get your business.

LIBOR - an abbreviation for "London Interbank Offered Rate, and is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Adjustable Rate Mortgages (ARMs). LIBOR-indexed ARMs offer borrowers aggressive initial rates (lower than many other ARMs) and has proved to be competitive with such popular ARM indexes as the 11th District Cost of Funds, the 6-Month Treasury bill, and the 6-Month Certificate of Deposit. With the LIBOR ARMs borrowers are generally protected from wide fluctuations in interest rates by periodic and lifetime interest rate caps.

WHAT IS DEFERRED INTEREST OR NEGATIVE AMORTIZATION?

With the COFI/COSI/CODI/MTA/LIBOR Option ARM mortgage, CHOOSING THE OPTION OF "MINIMUM PAYMENT" sometimes doesn't cover all of the interest due that month. When that happens, you "defer" the extra Interest, by adding it to the outstanding balance of your mortgage or incur negative amortization. Deferred interest may occur if:

You have a mortgage with a special "MINIMUM PAYMENT" option.

THE INDEX THAT DETERMINES THE INTEREST RATE on your loan goes up and therefore the interest you owe that month is more than the minimum payment. . However, the factors that cause deferred interest are also the factors that make a loan affordable:

A MINIMUM PAYMENT allows payments to remain low during the critical first five (5) years of home ownership.

PAYMENT CAPS limit how much the monthly payment can rise each year. (Payments can also drop when the Index-falls.)

"How Will I Ever Pay Off My Loan If Deferred Interest Is Making My Balance Go Up?"

Your COFI/COSI/CODI/MTA/LIBOR mortgage is designed to pay off on time; it is guaranteed. While there are occasions when deferred interest can add to your loan balance, there are may other periods when your loan pays off at a faster than normal rate. Over time, these periods of deferred interest and faster payoff offset each other. The result: your mortgage pays off on schedule.

"Must I Have Deferred Interest On My Loan?"

No. Your loan has a Deferred Interest Payment Option that offers you a variety of choices on how to pay off your loan. These payment choices are clearly listed on the payment coupon of your monthly loan statement. You can, if you choose, pay all interest as it accrues, thereby avoiding having deferred interest added to your loan balance. You'll also always have an option to make a payment based upon the fully indexed rate or Index + Margin, thus avoiding negative amortization all together.

"Is It To My Advantage To Pay Deferred Interest As It Occurs?"

It all depends on your financial situation. For some homeowners, it's wise to pay all the Principal and Interest as it occurs. For many others, it makes more financial sense to pay just the Interest that is due, and others will opt to defer both their Principal and Interest, as they are looking for the lowest payments possible.

THE ADVANTAGES OF HAVING a "DEFERRED INTEREST/Negative Amortization" OPTION : Electing not to pay all the Principal and Interest will mean more cash in your pocket. Choosing this option (Minimum payment) makes financial sense if it helps you:

Keep house payments affordable in case of the loss of a job.

Save money by paying debts with higher interest rates than your mortgage, such as high interest credit cards. Use the money to help pay your other debts instead. You'll save the difference between the rate charged on other loans (18% or more for VISA, MasterCard, or store credit cards) and the much lower rate on your COFI/COSI/CODI/MTA mortgage, which is tax-deductible.

Make home improvements that increase the value of your property. Rather than paying deferred interest, use the cash you save to help you for:

New carpeting.

Adding a bathroom.

Landscaping your property.

Installing a sun deck.

Invest in other profitable alternatives. Use the money that remains in your pocket when you choose not to pay deferred interest to:

Fund an IRA or invest in a mutual fund.

Build up a college fund for your children.

The Index changes every month, but the Margin never changes. Your COFI, MTA, COSI, LIBOR or CODI loan balance will change monthly regardless of what payment option you choose:

If you make the "Fully Indexed" principal and interest payment option every month, your loan balance will always decline regardless of the movement of the Index. This is because your loan balance will be lower each month, and this lower balance will then be re-calculated by the new monthly Index + Margin. Hence, the yearly 7.5% Payment Cap will never be enforced or "come into play", because your outstanding loan balance will always be declining even if the Index is increasing.

If you make only the "Minimum payment" option, your loan balance will increase (negative amortization) for the first few years. This option is completely allowed by the Lender without hurting your credit rating, or charging any type of late fees. Hence, If your monthly Minimum payment is not sufficient to pay the full amount of interest due, the Lender adds this accrued but unpaid interest to the unpaid principal balance of the loan. Until repaid, deferred interest bears interest at the fully indexed rate of the loan. Eventually (because of the "forced" yearly 7.5% payment Cap adjustments), the Minimum payment is more than sufficient to pay the full amount of interest due, (this usually takes between 6-8 years depending upon your initial "Starting Rate", Margin, and the movement of the Index), and the Lender will subtract the amount that exceeds the interest due (negative amortization) from the principal balance, resulting in a principal reduction. Eventually, because of the 7.5% yearly payment cap, your Minimum payments will become a full P.I. payment or Scheduled payments.

Your existing principal balance may never exceed 110% (this amount may change from lender to lender) of the original principal balance amount in any 5 year period. If deferred interest (negative amortization) ever caused your principal balance to reach these limits, the Lender would immediately increase your Minimum payment without regard to the 7.5% payment cap. The increased Minimum payment would pay off the loan at the then current fully indexed rate (Index + Margin) and remaining term. In that event, in the 5th, 10th, 15th, 20th, and 25th years, the Lender would take the amount of deferred interest, add it to the existing balance, and "recast" or re-amortize the loan so that it will still pay off on its original term. This has never happened since the creation of the COFI program in 1981, because the Index moves so slowly!!

INDEX HIGHS AND LOWS OVER THE LAST TEN YEARS - FROM JANUARY 1993 THRU THE END OF 2003