While the Secured Overnight Financing Rate (SOFR) isn’t headline news, you may have read about in your daily news or a financial news source. If you haven’t, here are the basics:
- Adjustable Rate Mortgages (ARMs) with rates based on the London Interbank Offered Rate (LIBOR) will transition to the Secured Overnight Financing Rate (SOFR).
- The LIBOR will disappear from the global financial market in 2021.
- Consumers financing their homes with Adjustable-Rate Mortgage (ARMs) may be affected, as many ARMs were originally underwritten with the LIBOR.
While most homeowners have a fixed-rate mortgage, around 9% have an ARM. 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.
LIBOR versus SOFR: what’s the difference?
The SOFR is a secured, overnight rate based on actual repurchase transactions collateralized by Treasury securities. In comparison, the LIBOR is unsecured, and based entirely on a few banks’ daily estimates of future interbank borrowing costs. This means the SOFR is a more reliable indicator of the US lending markets’ rates.
Using the SOFR for determining your ARM borrowers’ rates will provide better pricing – even better than many 30-year fixed-rate loans. It helps improve your borrowers’ purchasing power, which enables them to consider more properties. 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.
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Oct 02, 2020