Interestingly, ‘Seller Concessions’ Can Benefit Both Buyers & Sellers

If you’ve been following my “Real Estate Today” column, you know that homes are taking longer to sell, and in some areas sales prices have decreased slightly.

Jaxzann Riggs, owner of The Mortgage Network, has been serving Colorado borrowers for 37+ years and she has witnessed more market fluctuations than I have in my 20 years. I asked her what “old and new” marketing and financing strategies she suggests for both buyers and sellers in this dynamic market.

   Her response: “First, buyers need to understand their highest priorities. Is investing the smallest amount of cash their priority, or are they more interested in minimizing the monthly housing expense in the early years of the loan? If they expect to own the property for many years, having the lowest possible 30-year fixed rate may be the highest priority. Buyers who are fortunate enough to be paying cash for a home are normally looking for the lowest possible purchase price, in which case seller concessions won’t matter to them.”

Let’s analyze each goal and how a seller concession built into a purchase contract can help you.

Goal #1:  Lowest Cash to Close

If your income is good and you are not concerned about your monthly housing expense, but you don’t have much cash to work with, a popular seller concession is one that covers your closing costs. That way, you only need cash for the down payment.

Goal #2:  Lowest Payment in the Early Years of Your Mortgage

If your income is likely to increase in the near future, and you want to minimize your monthly housing expenses until your pay increases or you receive an expected bonus, a temporary interest rate buydown funded by a seller concession might make sense. The simplest explanation of this strategy is that the buydown subsidizes a reduced monthly mortgage for the first one or two years of the mortgage.

Goal #3:  Lowest Interest Rate for the Term of the Mortgage

If this is a property that you expect to own for many years, it makes sense to ask for a seller concession that is utilized to buy the interest rate down on your mortgage for its full term.

So, the next question is, what is a reasonable dollar amount for a borrower to request from the seller as a concession? Each borrower and seller circumstance will vary, so there is no set rule, although Fannie Mae and Freddie Mac underwriting guidelines limit the seller to a contribution of 6% of the sales price (or 3% if the borrower is making a minimum down payment).

Seller concessions may only be utilized to offset closing costs, reduce the interest rate on a temporary or permanent basis, or to prepay mortgage insurance on behalf of the borrower. Seller concessions may NOT be used to reduce the down payment made by the borrower.

It might surprise a prospective buyer to understand the different impacts that a seller concession versus a price reduction can have on the monthly cost of their mortgage. And it might surprise sellers to learn that offering a concession in the form of an interest rate buydown can increase the pool of prospective buyers.

I am happy to explore buyer and seller wants, needs, and goals. Structuring a seller concession so that both buyer and seller benefit is possible once all parties agree upon the anticipated appraised value of a property. Of course, this is best done with the assistance of an experienced Realtor like me who knows how to evaluate the market trends in a particular community.

    If you are buying or selling and have questions about the different possible concessions, call Jaxzann at 303-990-2992.

How Concerned Should Homebuyers Be About Fed Interest Hikes?

It is no surprise that headlines like “Fed Hikes Rates” may discourage prospective home buyers, but they should not be discouraged. Jaxzann Riggs, owner of The Mortgage Network, explains why.

The “Federal Reserve” is the central bank of the United States. Founded by an act of Congress in 1913 with the primary purpose of enhancing the stability of the American banking system, the “Fed” is charged with helping to set “monetary policy” for the United States. It sets the “federal funds rate” which is the interest rate that banks charge each other to borrow or lend excess reserves overnight.

“Monetary policy” refers to the actions undertaken by the Federal Reserve to influence the availability and cost of money and credit offered to consumers and businesses to help promote national economic goals. 

You may have also heard the term “quantitative easing.” Quantitative easing (QE for short) is a policy or strategy which has recently been used by the Federal Reserve. During the COVID pandemic, the Federal Reserve not only cut the “Fed funds” rate to zero but it also purchased mortgage-backed and other financial securities to increase the supply of money for homeowners. This encouraged more lending to consumers and businesses. While the result of the policy remains to be seen, most economists suggest that it caused mortgage rates to be held artificially low. The combination of low rates and low housing inventory (construction of new homes fell dramatically following the 2007-2008 fiscal crisis) created the “inflation” of home values with which we are all familiar.

Some assume that the Federal Reserve sets mortgage rates… they do not, but they do influence mortgage rates. The Fed controls short-term interest rates (mortgage rates are long-term rates) by increasing them or decreasing them based upon the state of the economy. When the economy is struggling, the Fed lowers the rates, allowing banks to borrow money at a lower rate to lend to consumers. When the Fed decides the economy may be overheating (read inflation) they tighten the money supply by raising the Fed funds rate. While this does not directly increase mortgage rates, lenders must eventually do the same to keep up with their costs to borrow money from the Federal Reserve.

On July 27th, the Federal Reserve announced a three-quarter percent interest rate hike, and during that week the average 30-year fixed mortgage rate fell one quarter of a percentage point. When there is talk of the Fed raising their rate, mortgage rates can spike, but they typically correct by the time that the increase is actually announced.

Recent positive unemployment figures may cause the Fed to raise rates once again, but the Fed’s chairman, Jerome Powell, has also indicated that there may be a pause on future increases in order to assess their impact on the economy.

We all know that higher rates reduce purchasing power for buyers, but there have been some positives to higher rates. Fewer buyers in the market mean that inventories are rising, and sellers are willing to help buyers with “interest rate buydowns.” Buying at the right price is important, but asking the seller to help with the cost of an “interest rate buydown” instead of offering a lower purchase price will have much more impact on a buyer’s monthly mortgage payment. (Click here to read my July blog post on the topic of interest rate buydowns.) Buyers are qualified for monthly mortgage payments versus loan amounts, so reducing the rate on your new home loan increases your buying power.

If you have lending questions about your personal circumstance, Jaxzann Riggs is standing by. You can reach her on her cell phone at (303) 990-2992.

Mortgage Interest Buydowns Can Benefit Both Buyers and Sellers  

Interest rates have doubled in the last year. Buyers have reduced buying power at higher rates, and sellers are seeing their listings take longer to go under contract. Lowering the list price is one strategy to entice buyers, but that makes a nominal difference in terms of the monthly payment for a prospective purchaser. 

I talked with Jaxzann Riggs at The Mortgage Network to learn how buying down the interest rate can take the sting out of rising rates and more importantly, how sellers might employ the offer of a buydown to increase the number of offers received.

There are two types of buydowns — temporary and permanent, and each has its own benefits, but the MOST important thing to know about buydowns is that they can be paid for by either the buyer or the seller.

Let’s look at both options for a fictitious buyer.  Rebecca is interested in a house that is listed for $695,000. She is planning on putting 20% down, and her mortgage broker quoted her a rate of 5.454%, with a monthly P&I payment of $3,141. This payment is a little above what Rebecca was hoping for, so she is thinking about asking the seller to assist with the cost of an interest rate buydown.

Temporary buydowns allow the seller or the buyer to contribute money to an escrow account for the benefit of the buyer at the time of closing. A portion of the escrow is used each month to reduce the borrower’s payments for a set amount of time.  A  “2-1 Buydown” is a common option that decreases the interest rate for the first two years of the mortgage. The rate is 2% lower the first year, and 1% lower the second. While the buyer’s mortgage contract is always going to reflect the note rate, the buydown escrow is used to pay the remaining interest balance each month. To ensure that she can afford the full monthly payment, she must qualify for the loan based on the note rate.

In Rebecca’s scenario, a 2-1 buydown will cost $11,968, and would lower her first year’s monthly payments to $2,482, equivalent to an interest rate of 3.454%. This is a monthly savings of $659, which will be paid out of the buydown account. The second year she will pay $2,802 monthly, comparable to a 4.454% rate, with a savings of $339 a month. The third year she will have exhausted the subsidized funds and she will pay the full payment of $3,141 for the remainder of the loan. While the effects of this option only last a couple of years, the monthly savings are significant and for borrowers who anticipate increases in income, this can make home ownership more of possibility.

Permanent Buydowns allow the rate to be “bought down” for the life of the loan. “Points” are paid to the lender at the time of closing in exchange for a lower rate for the life of the loan. While the monthly savings aren’t quite as dramatic as with the temporary buydowns, the benefit will continue throughout the life of the mortgage. 

For Rebecca, the dollars that she would spend for a temporary buydown, $11,968 would buy her rate down to 4.796% for 30 years, lowering her monthly payments to $2,968, saving her $157 a month versus a payment based upon a current rate of 5.45%.  Again, this buydown could be paid for by the seller instead of lowering their sale price, to make their listing more attractive to more buyers.

The bottom line is that buydowns make sense for some.  And sellers who are willing to participate in the cost of buydowns will dramatically increase their buying pool.

If you would like more information about buydowns, call Jaxzann at (303) 990-2992.

With the Rise in Mortgage Interest Rates, ARMs Are Making a Comeback and Can Save You Money

As mortgage interest rates rise, many potential homebuyers have asked me about the wisdom of using an adjustable-rate mortgage loan (often referred to as an ARM) to finance their home purchase. 

Adjustable-rate mortgages, also known as “variable-rate mortgages” are mortgages that offer a low introductory interest rate for a specific period of time. The borrowers’ interest rate and correspondingly their monthly principal and interest payment will be “locked in” for the first five, seven, or ten years. For example, a 10/6 ARM means that you will pay a fixed interest rate for 10 years, then the rate will adjust every 6 months. A 7/1 ARM, on the other hand, means that your rate will be fixed for 7 years and then the rate will adjust every year.

Because the lender is not “locking in” the interest rate for a 30-year period, the borrower is sharing in the risk associated with rising rates. In exchange for the ability to increase the borrowers’ rate based upon future market conditions, lenders offer lower rates for ARMs than they do for 30-year fixed rate loans. The lowest ARM rates are offered on shorter terms, as an example, a 5-year ARM will have a lower rate than a 10-year ARM. The difference in today’s pricing for a 5-year ARM versus a 30-year fixed rate is approximately .75%, with a 5-year ARM being offered at 4.25% and a 30-year fixed rate loan being offered at 5.00%

Borrowers considering an ARM should know which index will be used to calculate their new interest rate, as well as the “margin” that will be added to the indexed rate to determine the “fully indexed interest rate” at the time of adjustment. While this might seem extraordinarily risky, all loans offered thru FNMA and FHMLC (and most jumbo lenders as well) “cap” the increases that can occur at each adjustment period as well as the maximum amount that the rate may increase over the life of the loan. Unlike the ARMs of previous years, borrowers are not allowed to make partial interest payments, so there is no risk of the loan amount increasing as the rate increases.

The most obvious benefit to choosing an ARM is lower monthly payments. While homebuyers will have to qualify for the loan based on the future higher payment price, they can take advantage of the lower payments by investing the savings somewhere with higher gains, making home improvements, or adding more to the principal balance to pay off the loan more quickly.

ARMs are typically best suited for borrowers who do not anticipate that they will still own the home at the time of the initial adjustment or those who anticipate increases in income that will keep pace with interest rate increases. If a borrower’s circumstances change, there is always the option to refinance into a fixed rate loan. Unlike ARMs of the past, there are no longer prepayment penalties to dissuade the borrower from refinancing once the initial fixed interest rate ends. If you decide to refinance from an ARM to a fixed-rate mortgage, the refinancing process is straightforward and is similar to when you purchased your home. When you refinance, you take out another loan that is used to pay off your original note, then your new payments are based upon the new loan.

As the housing market continues to change, Jaxzann Riggs, owner of The Mortgage Network, is available to answer questions and help you decide which loan options are best suited for your current needs.

You can reach out to Jaxzann with any questions at 303-990-2992.  Mention that I suggested you contact her.

Overdue Medical Bills? Upcoming Changes Will Improve Your Credit Score  

Your credit scores affect nearly every facet of your financial life. And it’s no secret that life is better with a good credit score. Good credit makes it easier to buy a car, rent an apartment or get a home loan. 

Jaxzann Riggs, owner of The Mortgage Network, shared with me some important changes that will likely improve many consumers’ credit scores.

While many potential homeowners do their homework and check their credit scores prior to applying for a loan, they are often surprised when they sit down with a mortgage broker, who informs them that the credit scores appearing on their “tri-merged, residential credit report” are significantly lower than those obtained thru consumer online sites. For some, this could mean that their house hunting is going to have to wait. 

Bank sites and Credit Karma may give you a good picture of your “consumer” credit score, but when mortgage lenders review your credit history, they use a credit score formula tailored to determine what kind of risk you’ll be for a mortgage loan. The formula weighs pieces of your credit history differently to test for such risk factors as debt collections that have been paid off. The score is tailored to mortgage lenders because it’s specifically focused on your ability to repay a home loan, versus an auto loan or credit card. With credit scores, the higher the score, the lower the mortgage interest rate. For borrowers with a credit score under 740, lenders factor the additional risk into your interest rate.

What impacts different scores? Mortgage lenders typically use a FICO score (by Fair Isaac Corporation) to determine your loan options. Your FICO score is based on many things such as your amounts owed, length of credit history, and your payment history. Payment history alone accounts for 35% of your FICO score, which looks at late payments, unpaid balances, or accounts that have gone into collections. While you may have paid off the collection shortly after a notice, unfortunately, those negative records can stay on your FICO report for a long time!

A collection account, no matter what it is owed for and no matter what the amount, can easily drop a credit score 100 points or more, depending on what the rest of the credit report looks like. According to the Consumer Financial Protection Bureau’s research, 58% of collections on a consumer’s reports are medical. And as of June 2021, the amount of medical debt on consumer credit reports was $88 billion dollars

Good News Has Arrived

Starting July 1st, the three large credit bureaus — Equifax, Experian and TransUnion — will stop including medical debt that went to collections on credit reports after it’s paid off. Under current practice, it can remain on your record for seven years.

Additionally, consumers will get a year, up from six months, before unpaid medical debt appears on credit reports once it goes to a collection agency. And in the first half of 2023, the credit bureaus will stop including anything that has a balance less than $500.

What does that mean for your FICO score? Well, that is a good question! While we know that the changes will positively affect many people, we don’t know the extent to which it will change the mortgage FICO scores until the changes go into effect.

If you have questions about your credit scores or report, get in touch with Jaxzann at 303-990-2992. She will also answer any other mortgage loan questions that you may have. 

Amid Today’s Rising Interest Rates, Let’s Revisit the Concept of Buying Down Those Rates  

With mortgage rates rising and many homebuyers believing that now is the time to buy, anything that can reduce the cost of a mortgage is worth looking into. Many savvy homebuyers are asking about discount points, wanting to know what they are and whether it makes sense to buy them.

Mortgage points, often referred to as discount points, let you make a tradeoff between your upfront costs and your monthly payment. By paying points, you are essentially buying down the interest rate. You pay more upfront, but you receive a lower interest rate, decreasing your monthly payments.

The cost of one discount point is equivalent to 1% of the total mortgage. In other words, if you had a $400,000 loan, the cost of purchasing one discount point would be $4,000. Lenders typically allow a borrower to purchase up to three discount points, and they can also be purchased in increments of one-half point.

The specific amount that an interest rate will be reduced with the purchase of points varies from loan to loan but can be thought of as a 0.25% rate reduction for each point purchased. Thus, if you had an initial interest rate of 5% and purchased 3 discount points, your new interest rate would be 4.25%.

How do you know if it makes financial sense to pay for points? The first step is to calculate how long it will take for the decreased monthly payments to pay for the added upfront fee. This is called the “breakeven point.” You can determine when you will break even by dividing the total cost of the discount points by the monthly savings. The answer will be the number of months it will take. Divide this number by 12 to find the number of years it will take.

Here’s an example to show how it would work for you. The cost of buying down the rate from 5% to 4.25% on a $400,000 loan would be $12,000. The difference in the monthly principal and interest (“P&I”) payment between 5% and 4.25% would be $178 per month ($2,138 P&I at 5% versus $1,960 P&I at 4.25%). If you are spending $12,000 to save $178 per month, you will need to own the property for 67 months to break even.

If you were to sell the home or pay off the loan (including by refinancing) in the first 5½ years, you would not be reaping the full benefit of your rate buy-down from buying points.

On the other hand, if you bought down the rate to 4.25% and stayed in your home for thirty years, the difference in monthly payments over the life of your 30-year loan would be $64,080. Subtracting the initial investment of $12,000, you would be left with savings of roughly $52,000. As you can see, whether paying points makes sense for you depends primarily on one major factor — how long you think you will keep your home and/or the mortgage on it. If you don’t plan to keep your home for very long, or plan on refinancing soon, it may not benefit you to purchase points.

Purchasing a home is a major financial step. If you aren’t sure how long you will be in the property, you may decide that the money spent on points would be better spent on furnishing or fixing up the property, or by simply investing it in another financial instrument that will gain value over time.

Jaxzann Riggs of The Mortgage Network helped me with this column. You can reach her at 303-990-2992 for more information about points and to discuss whether they may be right for your personal financial journey.

The Surge in Mortgage Interest Rates Could Trigger a Market Slowdown  

Earlier this year, the conventional wisdom was that mortgage interest rates would rise to the 4% range by the end of the year, so when the rates rose to 5% abruptly in early April, it took us all by surprise.

The agents at Golden Real Estate are noticing a reduction in bidding wars, which might be due to the increased cost of financing a home purchase. It may be too early to draw any conclusions, but the interest rate increase is not looking temporary at this point, so we’ll have to see how the statistics for April and May come out.

Principal and interest (P&I) on a 30-year $500,000 loan at 4% has a monthly payment of $2,387. At 5%, that rises to $2,684.  Earlier this year, you could get that loan for 3%, which would cost $2,108 per month for P&I.

How does this affect affordability?

With a 3% interest rate, a person could get a $637,000 loan for the same P&I as a $500,000 loan at 5%. That is enough of a shock to disrupt many buyers’ purchasing plans.

I’ll be watching and let you know.

Changes Announced to 2nd Home & Jumbo Loans, Self-Employed Borrowers and Appraisal Fees  

I received a call this week from Jaxzann Riggs, owner of The Mortgage Network informing me of several changes occurring at FNMA and FHLMC that may “level” the playing field for some purchasers.

Roughly 17% of the homes sold in the last 12 months in the Denver metro area have been sold to investors, according to an article in the Denver Post. Demand for second homes has also skyrocketed, as newly remote workers seek more space and better surroundings. Until now, those purchasers were able to obtain loans with interest rates that were comparable to those being offered to purchasers who would be occupying their new home as their primary residence.

On Jan. 5th Fannie Mae and Freddie Mac (FNMA and FHLMC) jointly announced new “loan-level price adjustments” (or LLPAs) for high-balance, investment and second home loans. An LLPA is a risk–based fee assessed to mortgage borrowers using a conventional mortgage. Loan pricing adjustments vary by borrower, based on loan traits such as loan-to-value (LTV), credit score, occupancy type, and the number of units in a home. Borrowers often pay LLPAs in the form of higher mortgage rates. Increasing the LLPAs on high-balance, investment and second homes makes interest rates less attractive for the buyers and allows FNMA and FHLMC to offer new programs to help first-time or lower-income homebuyers.

Other recent changes by FNMA and FHLMC help self-employed borrowers.  They have rescinded rules imposed in June 2020 requiring self-employed borrowers to supply a year-to-date P&L as well as their most recent 2 or 3 months of bank statements. This reduction in paperwork should make it much easier for self-employed borrowers to obtain financing.

Another benefit may be found in the potential for lower appraisal fees. With the current red hot housing market, demand for appraisers is outstripping the supply, pushing up fees and extending appraisal completion times. Enter technology. Fannie Mae will allow desktop appraisals for certain loans submitted after March 19. This technology may help alleviate the appraiser shortage in the long term and lower appraisal costs in the current market. Jaxzann reminded me that she pays for her clients’ appraisals so they can be ordered immediately upon acceptance of a purchaser’s offer. With the ability to obtain desktop appraisals, Jaxzann expects that loan approvals can consistently be obtained in two weeks.

Though median home prices have shot up in the last two years (by 25%, according to HUD), what hasn’t changed is that people still need their homes to serve as an anchor for their life.

If you are in the market for a jumbo loan, things have gotten easier. A jumbo loan is a mortgage that exceeds the conforming loan limit set by the federal government. Jumbo loans — meant to finance expensive properties — cannot be purchased or securitized by FNMA and FHLMC. Loan amounts above $684,250 are considered “jumbo” and often have higher standards for approval. 

While people typically assume you need 10% down for a jumbo loan, there are currently products that allow as little as 3.5% down. This can free up some of your savings for being more competitive in this market, using funds for escalation causes, appraisal gaps, updates if the house isn’t in dream home condition.

Yes, today’s market can make buying a home stressful, but working with an experienced professional like Jaxzann Riggs will allow you to navigate its challenges. Call her at 303-990-2992 with your lending questions.

The Hidden (But Very High) Cost of Waiting to Buy Your Home  

It seems almost impossible to open a newspaper or listen to a news broadcast without being reminded that mortgage loan rates are on the rise. I asked Jaxzann Riggs, owner of The Mortgage Network, for her thoughts on how rising rates will affect our market. Here is what she told me.

Borrowers are being impacted on two levels right now. In the Denver metro area, the median price for a single-family home has increased by 19.3% in the past 12 months, according to the Denver Post. That means a home that you could have bought for $502,775 in January 2021, would cost $599,900 now.

Let’s assume that you agreed to purchase that home in January 2021 for $502,775. At that time, interest rates were hovering around 2.75%. If you made a 20% down payment, your expected monthly principal and interest payment would be approximately $1,642. If, on the other hand, you waited until January 2022 to buy that same home, your purchase price would be $599,810 and your interest rate would have risen to 4.087% and you would be paying $2,315 per month in principal and interest. That’s an increase of $673 per month.

Underwriters qualify borrowers for a maximum monthly payment based upon their income and other monthly liabilities. Underwriters refer to this as the borrower’s “debt to income” ratio, or DTI ratio, a term that you may have heard before. The maximum allowable monthly payment is then translated to a loan amount based upon current interest rates.

Rising rates make the maximum loan amount that a borrower can afford a moving target. By most accounts, The Federal Reserve is likely to increase the federal funds discount rates 3 to 5 times this year, with an increase certain to occur on March 16th. There is no direct correlation between the fed funds discount rate and long-term mortgage rates, but the trend for both is up. Jaxzann believes that the March 16th increase has already been factored into the cost of 30-year mortgage money by Fannie Mae and Freddie Mac, but expects rates as high as 4.75% by the year’s end. The mortgage market is resilient, changing daily, and we are beginning to see a variety of loan products (for example, adjustable-rate mortgages and interest-only loans) being offered by conventional lenders that will offset some of the damage done by increasing rates.

 While prospective purchasers can’t control real estate prices or mortgage rates, they do have some small measure of control when it comes to the price they pay for a loan while they are actively shopping for a home. Many of our lending partners have begun to offer a feature that allows the borrower to obtain a preliminary loan approval (without finding a property) and to “lock in” an interest rate, while shopping for a new home. Some lenders will lock in an interest rate for up to 120 days while their clients shop, but the most common term is 90 days. The lender charges a small premium to hold the consumers’ rate for a set timeframe and typically will also offer the borrower the ability to “roll down” the rate if interest rates drop by a preset amount during the lock period. Borrowers wishing to execute the roll down feature will pay a small fee, but it ensures that they will still be able to qualify for a specific loan amount, when they finally go under contract.

What does this mean for future homeowners? The cost of waiting is just too high. Don’t allow rising home prices and mortgage rates to price you out of the market. If you are currently house hunting and would like to learn more about locking in an interest rate, call Jaxzann at (303) 990-2992.

Do You Have an Adjustable Rate Mortgage? Here Are Some Important Changes

I recently received a call from a reader asking what is likely to happen with his adjustable rate mortgage (ARM) that is tied to the LIBOR Index. LIBOR may be just another acronym that you’ve skipped over in the sea of real estate acronyms, but if you have an ARM read on, because the “index” (LIBOR) that is used to set your interest rate is being phased out after 2021. I asked Jaxzann Riggs, owner of The Mortgage Network what borrowers should expect.

LIBOR, or the London Interbank Offered Rate, was a benchmark interest rate index used for decades by lenders all around the world, as a predictor of future loan costs. To break it down, LIBOR was calculated based on estimates of the average interest rate a group of leading global banks would charge each other for short-term loans. Lenders then used that information (referred to as the “index”) to calculate the rate you would pay for your mortgage as the interest rate on your ARM was “adjusted.”

During higher-priced housing markets, many homeowners chose an adjustable rate mortgage because they preferred the lower monthly payments that an ARM offered. Most ARMs created in the past 20 years were tied to the LIBOR benchmark, which is why this index has played an important role in how much interest you pay on your mortgage if you have an ARM.

The LIBOR index, as I said, is being phased out. Introduced in 1986 by the British Bankers’ Association, the LIBOR index quickly became the default standard interest rate used by both local and international lenders. Despite wide acceptance, LIBOR was based on self-reporting and good faith estimations, which made it very susceptible to manipulation and fraud. Scheming and collusion within the LIBOR index were brought to light in 2012, causing distrust, tighter regulations, and the beginnings of a plan to create a new system. 

Introducing… SOFR, the Secured Overnight Financing Rate (pronounced “so-far”).

Effective January 3, 2022, the mortgage industry began to adopt SOFR. SOFR is a benchmark rate that uses the rates banks are charged for their overnight transactions. This system helps deter manipulation and subjectivity, as it is based on transactions secured by U.S. Treasuries.

What does this mean for you?

Absolutely nothing if you have a fixed-rate mortgage. However, if you have an adjustable rate mortgage, you might see changes in your upcoming bills. ARMs typically adjust annually and as LIBOR-based ARMs hit reset, the new SOFR index is likely to be used to calculate your new rate. When SOFR ARMs reset, they will be adjusted every six months, the reason being that the 1-year LIBOR looks forward, while SOFR looks backward. LIBOR reflects where interest rates are expected to go in the next 12 months, while SOFR reflects an average of short-term rates during a recent 30-day period. 

Jaxzann told me that LIBOR and SOFR rates should be close to each other. “It won’t be identical but within the margin of a homeowner’s perspective, it should be a minimally different.” 

I agree that the switch from LIBOR to SOFR is going to have a relatively limited effect on most borrowers, but as with all things, knowl-edge is power and consumers who have an ARM should contact their loan servicers to discuss the changes that they can expect.

So, take a deep breath and remember, you are not alone in this! Reach out to Jaxzann Riggs  at 303-990-2992 to discuss the implications that SOFR will have on your existing ARM or the future benefits that you might enjoy by having an ARM.