ARM Mortgage Loans and the Upcoming LIBOR Transition
At Tech CU, we value transparent financial processes and aspire to help you every step of the way on your financial journey. We want you to be aware of a future change to interest rate calculation on adjustable-rate mortgage (ARM) mortgage loans. This change is driven by the recommendation of the Federal Reserve Bank to banks, credit unions, and mortgage servicing companies. Please know there is no action needed, but members are welcome to reach out to us if they would like to discuss.
How an Adjustable-Rate Mortgage (ARM) Works
An ARM mortgage loan features a fixed interest rate for a period of time and then the interest rate adjusts periodically to reflect a new interest rate. The full interest rate for an ARM mortgage loan is calculated by adding a margin to an index interest rate.
The index interest rate is published by third parties and is a broad measure or “benchmark” of interest rates. A margin is then added to the index to determine the full interest rate on an ARM mortgage loan.
The London Interbank Offered Rate (LIBOR) is an index rate used by many mortgage lenders. The LIBOR index is currently used to determine the interest rate for ARM mortgage loans, and the original index and margin were specified in the NOTE agreement.
What You Need to Know
In recent years, the LIBOR index has come under scrutiny for susceptibility to manipulation and it is now slated to be discontinued. As a result, the Federal Reserve Bank has formally recommended replacing it. The LIBOR index used to determine the interest rate for ARM loans will therefore be replaced by a new index. Here is a summary:
- Currently, the interest rate on an ARM mortgage loan consists of the LIBOR index and a margin.
- The LIBOR index will be discontinued or deemed unsuitable for industry use after June 30, 2023.
- When LIBOR is no longer available or is deemed unsuitable, we will replace it with a new index to determine future interest rate and payment charges for ARM mortgage loans. This transition also may entail a change in the margin.
Replacement Index Options Are Being Considered
As described in the NOTE agreement, when the LIBOR index is no longer available, an alternative published index to replace LIBOR will be selected for ARM mortgage loans, consistent with the terms of the ARM mortgage loan. Credit unions and banks are working with the industry and government representatives to consider possible index replacement options.
The replacement of the LIBOR index will NOT change other terms of an ARM mortgage loan, such as the maximum interest rate payable during the term of the ARM mortgage loan or the timing of any interest rate resets. If you have an ARM mortgage loan, the account statement contains the current interest rate.
Again, there is no action required, but members are welcome to reach out to us with any questions.
Here for You
A mortgage is a substantial investment. Members with questions about an ARM mortgage loan and the upcoming index change should feel free to reach out to us by contacting a mortgage consultant:
Khatija Begum, [email protected], (408) 209-4693
Troy Hall, [email protected], (408) 441-4761
Hermelinda Negrete, [email protected], (408)221-5586
We will be happy to answer any questions on this change and also discuss alternatives for refinancing a loan while interest rates are still at historic lows.
If you would like to do a bit of research on your own, here are a few sources:
Frequently Asked Questions
Q: How does this affect Tech CU Members?
A: Tech CU has originated residential first mortgage loans using LIBOR as the index for adjustable-rate mortgage (ARM) loans. The index and the margin are used to determine the borrower’s interest rate. Tech CU mortgage loans that use the LIBOR Index will be impacted and members with affected loans will receive regular communication from Tech CU regarding the forthcoming change.
Q: What is going to happen to members with LIBOR ARM loans?
A: The LIBOR rate will be discontinued or deemed unsuitable for industry use after June 30, 2023. Tech CU is currently monitoring industry and regulatory agencies to consider a possible replacement. Until that time, Tech CU members with a LIBOR ARM mortgage loan will not see a change in the index, however, we will begin to notify impacted members regarding the upcoming change prior to June 30, 2023. If you are a member with a Tech CU ARM loan that currently uses the LIBOR index, please be on the look-out for updates via email (or US Postal Service, if the email address is outdated.)
Q: How will Tech CU notify the members?
A: Until a new index is selected, Tech CU will be sending out e-mail notifications (mail notifications for members with outdated emails). This web page will advise about the upcoming change to the LIBOR index. Once a new index has been selected, affected members will be notified.
Q: How will the replacement of LIBOR affect my loan?
A: The replacement of LIBOR will NOT change other terms of the ARM mortgage loan, such as the maximum or minimum interest rate, the term of the ARM mortgage loan, or the timing of any interest rate resets. Your NOTE agreement allows Tech CU to select an alternative published index if the current index is no longer available, as will be the case with LIBOR after June 30, 2023.
Q: Do I need to take any action?
A: There is no action required. Tech CU will be sending an email or a letter to affected borrowers advising of the new index.
Q: Who may I contact with more questions regarding my LIBOR ARM mortgage loan?
A: You can speak to any staff in the mortgage servicing area. Please see above for names and contact information of our mortgage consultants.
Q: What other options do I have if I do not want to move to the new index?
A: You have the option to refinance the loan, subject to approved credit. You are welcome to reach out to a Tech CU Mortgage Consultant to discuss today’s programs and rates, which are at historical lows.
Q: Is Tech CU still originating residential first mortgage loans using LIBOR as the index?
A: No. Starting in June 2021, Tech CU made changes to its first mortgage loan programs and discontinued using LIBOR as the index for ARM mortgage loans. Tech CU is now originating ARM mortgage loans using the Secured Overnight Financing Rate (SOFR) index.