Approaching a rate reset date also may increase prepayments. The interest rate environment during the period of time in which the convertibility option is active may trigger a prepayment when a borrower expects interest rates to rise and wishes to limit that risk by converting to a fixed-rate mortgage. Because the COFi lags behind market rates, sharply declining market rates would trigger some COFi ARM borrowers to prepay in order to refinance at the lower fixed rates. In general, any time that an ARM borrower is faced with an appreciable drop in fixed-rate mortgage rates and the prospect that the ARM will not reset soon to an equally attractive rate, prepayment can be expected. Geographical distribution also is a factor in prepayment.
ARMs are very popular in areas where mobility is high.
As a result, these ARMs tend to prepay more quickly than ARMs originated in other parts of the country.