Big Changes to Adjustable-rate Mortgages

man in purple suit jacket using laptop computer

If you have ever taken out one of those adjustable-rate mortgages (ARMs), you may have come across the term “LIBOR.” It’s short for London Interbank Offered Rate — an acronym for the index that’s often used as a benchmark for determining the periodic interest rate adjustments made on many adjustable-rate home loans.

ARMs carry limitations to how high or low future interest rates can be adjusted as well as details about how often the changes will be made. The index that will govern the amount the mortgage holder pays each month is named in the small print on the loan papers. LIBOR is one possibility. Others are the CMT (Constate-Maturity Treasury securities), COFI (Cost of Funds Index), MTA (Monthly Treasury Average), or the rates that are published in periodicals like the Wall Street Journal.

Why these minutiae are suddenly of interest is because the LIBOR is in trouble—deep trouble. Actually, beyond trouble. LIBOR is going away. Without wading into the murky details, it turns out that investigators discovered that the all-important, trusted rates that LIBOR had posted in the past were—how to put it nicely? — not always totally on the up-and-up. Okay—LIBOR was rigged. Bad actors slightly nudged the numbers for their own profit. Since financial markets depend on straight dealing for such an important cog in the wheels of international finance, the result was unanimous agreement by regulators to ditch the whole thing—regardless of the hassle that entails. As Yahoo!finance observed last week, “The move is one of the biggest market switches in decades….” It needs to be completed by the end of this year.

The “move” will be from the LIBOR benchmark to the agreed-upon replacement: the SOFR (Secured Overnight Financing Rate). But since so many trillions of dollars are contractually tied to LIBOR, the transition is proving to be a technical nightmare—not just for the lenders, but (per Yahoo) “also for the borrowers who will need time to rework their internal systems and processes….”

Fortunately, for area homeowners, any change to their own ARMs aren’t really going to inconvenient them. Their lenders will, as before, simply inform them of any bottom-line adjustments to their monthly payments. Since interest rates remain at bargain-basement levels, any near-term changes are expected to continue to produce pleasant payment amounts. Area fixed-rate mortgage holders needn’t worry at all—rates are locked at great rates for the whole term of their loans.