New Changes Affecting Adjustable Rate Mortgages

What is happening?
Adjustable-Rate Mortgages (ARMS) with rates based on the LIBOR will disappear from the global financial market in 2021. This is in accordance with regulatory requirements from the Federal Housing Finance Agency (FHFA) to Fannie Mae and Freddie Mac.

Why is this happening?
Historically, ARM interest rates were based on the London Interbank Offered Rate (LIBOR) which is based on unsecured transactions. Due to the uncertainty and risk of the LIBOR, ARM product interest rates will now be based on the Secured Overnight Financing Rate (SOFR). The SOFR is a more reliable indicator of the US lending markets' rates. 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.

How does this change the ARM product?
After the initial fixed rate period, ARM products will no longer reset annually, they will reset every six months. The SOFR products reset twice a year after the initial fixed period.
SOFR products have a lower rate change cap after the first six months which is better for customers. See chart below.*

EXAMPLE: Typically, a 5/1 ARM product would have a fixed rate for the first five years then reset annually for the life of the loan. This same product will now be called a 5/6 ARM product with the interest rate remaining fixed for five years and then resetting every 6 months for the life of the loan.

When does this happen?
Premia Relocation Mortgage will begin using the SOFR to calculate ARMS on September 21, 2020. This includes all ARM products - 3-,5-,7-,and 10-year fixed period ARM products.

Why is this important?
Using SOFR for determining ARM borrowers' rates may provide better pricing - even better than many 30-year fixed rate loans. This can help improve purchase power, which enables homebuyers to consider more home options. This is especially helpful in areas where buyers outnumber sellers.

What if I have an existing mortgage that is an ARM product?
You will be contacted by your servicer with more details. Fannie Mae and Freddie Mac are providing direction to servicers on how to make this change for existing customers with ARMS.

*Chart example
Index Product Example Fixed Rate Period Reset Period Fist Rate Change Caps Subsequent Rate Life Cap
LIBOR 5/1 5 yrs 1 yr +2%/-2% +2%/-2% 5%
SOFR 5/6 5 yrs 6 mos +2%/-2% +1%/-1% 5%

- Sep 04, 2020