FHA Adjustable Rate Mortgages in 2021
February 21, 2021The Index Changes
Lenders use a specific market index off of which an ARM’s interest rates are based. Until recently, most financial institutions, including the FHA, were using the London Inter-bank Offered Rate (LIBOR), but it was decided that effective January 3, 2022, the mortgage industry will put aside LIBOR and adopt the Secured Overnight Funding Rate (SOFR). The U.S. Federal Reserve Board and New York Federal Reserve are set to oversee the transition from LIBOR to SOFR, and have recommended that most new ARMs use SOFR instead of LIBOR beginning in September, 2020.
Why Does This Matter?
To understand why this change matters, you must know how an ARM works. The interest rate you get with an ARM is based on an index and a margin (which is disclosed when you apply for the loan). Your adjustable rate is calculated by adding the loan margin to the index, so as the index figure changes, so will your interest rate.
With the implementation of a new index, the changing rates of ARMs may start to look different. While both LIBOR and SOFR are used to measure the cost of short-term borrowing, the indexes measure that cost differently. Greg McBride, chief financial analyst at Bankrate states that, “SOFR is based on actual market transactions whereas LIBOR was determined by what various banks would charge each other to borrow on an overnight basis.” When it became clear that certain banks were able to manipulate the LIBOR rate, SOFR was created to be a more accurate and reliable index that is less susceptible to such manipulation.
While the majority of borrowers and loan applicants will not be affected by the new mandate, those with adjustable- rate mortgages, a home equity loan, or a reverse mortgage might see changes to their loan depending on how it is indexed.
McBride states that ARMS based on LIBOR will no longer be purchased by Fannie Mae and Freddie Mac. "SOFR is rapidly replacing it. Treasury-indexed ARMs are unaffected.”
Next Steps
It is important for borrowers to be in the know, and stay on top changes in their interest rate. While it is expected that the changes will relatively minor, mortgage holders with an ARM should contact their loan servicers to see which index their mortgage is based on, to avoid being caught off guard with the next adjustment. If the loan is tied to LIBOR, lenders can help identify when it will switch to SOFR and what that change could mean for the particular ARM.
------------------------------
RELATED VIDEOS:
Disclosures Give Transparency to Borrowers
Understanding the Purpose of Your Mortgage Down Payment
Putting Money Into Your Escrow Account
FHA Loan Articles
July 15, 2023To qualify for an FHA loan, you must meet certain employment requirements. In this article, we'll dig into the FHA loan employment requirements so that you can understand what's needed to get approved for this type of mortgage.
July 7, 2023Manufactured homes, sometimes referred to as mobile or modular homes, are factory-built residences designed to meet or exceed national building codes set HUD. They offer cost savings and energy efficiency, making them an attractive housing option for many Americans.
July 2, 2023Buying a home is a significant milestone in life, and for many, it's a dream come true. However, the path to homeownership can be fraught with challenges, and one of the most concerning issues can be high FHA loan interest rates.
June 27, 2023The FHA loan process is straightforward and has been successfully navigated by millions of homeowners. If you're considering an FHA loan to finance your home purchase, it pays to be prepared. To avoid mistakes before you start your loan application, homebuyers should keep these tips in mind.
June 20, 2023Can an FHA loan be approved if there are late or missed payments on the credit report? Navigating through financial challenges, such as escalating costs of living and employment uncertainties, can indeed make it difficult to maintain a perfect financial record.