Adjustable-Rate Mortgage (ARM)

An ARM (adjustable-rate mortgage) is an alternative to a fixed-rate home loan that offers an “introductory” interest rate set lower than that for conventional loans. The loan proceeds at this rate for an agreed-upon period of time, usually several years. Once the introductory period expires, the interest rate “resets” – moves up or down in line with the movement of an “index” (currently the LIBOR). Following this movement, the amount of interest you pay each month gets larger or smaller.

Typical advantages of ARMs include:

  • Lower starting interest rate
  • Lower starting monthly payment
  • Ability to afford more house space
  • Possible to pay less in return, in favorable market conditions

ARM Yourself for Changes in Adjustable-Rate Mortgages

Changes are coming to most ARMs (adjustable-rate mortgages) when the LIBOR index goes away in 2021. How does this impact borrowers? If you purchased your home with an adjustable-rate mortgage, you will likely be affected by this new rate switch. However, fixed-rate loans and adjustable loans that are set by another index such as the Prime rate are not affected.

What is LIBOR?

LIBOR stands for the London Interbank Offered Rate, a daily interest rate benchmark used to determine interest payments on almost all adjustable-rate financial products, including mortgages. LIBOR directly impacts the amount you pay on loans such as adjustable-rate mortgages and private student loans. When LIBOR is phased out, your lender will need to work with you to recalculate the rate you pay. (The interest rate on such a loan is typically LIBOR plus a certain number of percentage points.) To find out if your loan is affected by the LIBOR index, please refer to your closing disclosures document and look for the Adjustable Interest Rate (AIR) Table.

Why is LIBOR being phased out?

During the financial crisis, it was revealed that the London bankers were falsifying data that went into determining the rate. As a result, British and U.S. regulators levied billions of dollars in fines and plan to quit using the index in 2021. Another reason for the phase out is because LIBOR rates do not reflect costs from actual transactions.

Is there a replacement for LIBOR?

There are several options for a new index to use to determine ARM interest rates. The best U.S. alternative to LIBOR is called SOFR – the Secured Overnight Financing Rate – which is published by the Federal Reserve Bank of New York. But regardless of the index used, new loan agreements must be renegotiated and executed.

What are your options if you have an ARM based on LIBOR?

  • Refinance Now
    • Improve Your Mortgage –
      Take advantage of lower rates, lower payments or a better term
    • Eliminate Uncertainty –
      You can't predict how rates will fluctuate and change your monthly payments
    • More Choices –
      You can choose from a wide range of options, including another ARM
    • Expert Guidance –
      We can help you evaluate your options and choose the best program for your situation
  • Wait and Refinance Later (when your term is due or LIBOR ends)
    • If LIBOR is down when the mortgage rate resets, your monthly payment will be lower.
    • If LIBOR is higher, your premium each month will rise.
    • Index and program options may be limited

Contact us to refinance your ARM and secure your future.