Adjustable-rate mortgages (ARMs) all work essentially the same way. The interest rate changes periodically, according to the direction of prevailing interest rates. But lenders create various options to make ARMs attractive based on the individual financial goals and needs of their customers. While COFI mortgages are based on the Cost of Funds Index, their main appeal is offering options that you won't find with most traditional mortgage loans.

COFI pros

Flexible monthly payments: With COFI home mortgages, most lenders give you a choice of payment options, including interest-only payments and minimum payments. What's more, they let you choose your options and switch back and forth between them every month, if you like.

Easy to qualify for with good credit: Many lenders will allow you to borrow money using a COFI and treat it as a "low documentation" loan if you have good credit. This is a big advantage for those who are self-employed or work on commissions and have trouble verifying how much money they make from year to year.

Low introductory rates: COFI loans offer low introductory interest rates. This can help you qualify, because the low rate means that your monthly payments will be low, at least until the introductory rates expire and the loan adjusts.

COFI cons

There's one important drawback to COFI loans. Whereas most ARMs have predetermined caps to prevent the mortgage interest rate from climbing too high if interest rates skyrocket, COFI loans don't offer such protection.

Most homeowners use COFI loans because they can be designed to fit the specific needs of the borrower. If you have good credit and like to take control of your finances, this loan option may be your cup of tea or COFI.