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
June 16, 2022It’s a great option to consider if you want to build your dream home on your own land instead of buying someone else’s already-lived-in house. FHA One-Time Close mortgages are also referred to as single-close construction loans--you’ll see these terms used interchangeably.
May 7, 2022The appraisal process is a very important part of buying a home. When you are budgeting and planning for your loan, you may want to set aside some extra funds in case there are corrections required as the result of an appraisal.
April 12, 2022There is a major question some new borrowers have about home loans in general, that also applies to construction loans in particular. If you want to apply for an FHA One-Time Close construction loan, there are certain rules about loan funding that you should know about.
March 30, 2022Once you’ve decided that you’ll be purchasing a home, one of the first questions you need to ask yourself is what kind of mortgage you’ll be using to finance it. When it comes to shopping for a home loan, there are a number of options to consider.
March 3, 2022Savvy homeowners make it a point to monitor interest rates so they can take advantage of a drop. Many choose to refinance their mortgages to capitalize on falling rates and lower their monthly payments and save on interest.
