What Exactly is SOFR?
If you’re interested in the housing industry or financial markets, you may have heard a new acronym being thrown around – SOFR
. SOFR stands for Secured Overnight Financing Rate. It is the new index (aka the benchmark interest rate that reflects market conditions) recommended for setting interest rates on adjustable-rate mortgages (ARMs).
Certainty Home Loans will begin using the SOFR to calculate adjustable-rate mortgages (ARMs) in October of 2020. Previous to this change, the LIBOR (London Interbank Offered Rate) was the index used in setting rates for ARMs.
- Adjustable-Rate Mortgages (ARMs) with rates based on the LIBOR will transition to the SOFR.
- The LIBOR will disappear from the global financial market in 2021.
- The index is one of the main factors used in calculating an interest rate.
- Homebuyers currently financing their homes with an ARM may be affected, as many ARMs were originally underwritten with the LIBOR.
- ARM rates calculated with the SOFR may provide better pricing, improving a homebuyer’s purchasing power.
While most homeowners have a fixed-rate mortgage, around 9% have an ARM. An ARM is a type of mortgage
where the interest rate applied on the loan balance varies throughout the life of that home loan. The majority of ARM borrowers whose rates are based on the LIBOR will be transitioned to the SOFR. This is good news for these borrowers, and here’s why.
Why Change from LIBOR to SOFR?
LIBOR is unsecured and largely based on a few banks’ daily estimates
of future interbank borrowing costs. On the other hand, the SOFR is a secured, overnight rate based on actual
repurchase transactions collateralized by Treasury securities. This means the SOFR is a more reliable indicator of the US lending market's rates. Governments and financial institutions across the world have been working to find alternatives to LIBOR because it isn’t always reliable.
Using the SOFR for determining ARM borrowers’ rates may provide better pricing – even better than many 30-year fixed-rate loans.
This can help improve purchasing power, which enables homebuyers to consider more home options. This is especially helpful in areas where buyers outnumber sellers.
More about the SOFR
The decision to replace the LIBOR with the SOFR was made by a group called the Alternative Reference Rates Committee (ARRC), which was convened by the Federal Reserve. Click here to learn more about the ARRC
Interested in learning more? Find a local loan officer
to schedule a consultation.
Sep 14, 2020