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
June 15, 2023When you buy a home with an FHA mortgage, cash for closing costs and your down payment is required. It would be easy to assume you simply give the lender cash in the specified amount and that’s the end of the story.
May 20, 2023Did you know there is an FHA loan option that lets you build a house from the ground up? You can use this mortgage to build on land you own or on land you buy as part of the loan. But you will want to address some issues comparing construction loan options.
May 3, 2023Sometimes when buying a home there may be a question of surplus or excess land. You likely won’t face this issue when buying a condo unit, but for other types of purchases, this may be an important factor in the appraisal process.
April 18, 2023Your lender is required to make sure you can realistically afford your mortgage, and that means verifying that your income is stable, reliable, and will continue after your mortgage has closed. What some don’t realize about this process is that there are standards for verifying income.
April 1, 2023FHA loan rules for single family purchase loans include guidelines for the lender to use if the applicant has rental income. Some want to know whether it is possible to qualify for an FHA mortgage using rental income. The real issue is whether the rental income meets FHA loan rules.