FHA Adjustable Rate Mortgages in 2021
February 21, 2021
The 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
March 16, 2023Planning your FHA loan means asking some important questions early in the process. The most obvious question is associated with the type of home you want. How large a house do you need? FHA mortgages allow the purchase of homes with between one and four living units.
February 7, 2023There are tons of reasons why people decide that they’re done with renting and start looking into buying a home. Whatever your reason, deciding to buy a home is a big step, and one of the most daunting aspects is saving up enough money for the down payment.
January 27, 2023Before you get ready to commit to a home loan application, it’s good to review your circumstances and ask a few basic questions about your loan, your plans, and the home itself. Believe it or not, knowing what type of home loan you need is an important step.
January 10, 2023When getting ready to shop for a home loan, it's worth taking a look at your credit report. Your credit score is a big factor when lenders take a look at your loan application, and it plays a huge role in the interest rate you get.
December 23, 2022When it comes to buying a house, saving up for a down payment can be one of the most overwhelming aspects. While down payments are one of the biggest obstacles for many in the mortgage process, it helps to understand the ins and outs of why they play such a big role.
