LIBOR Is Being Phased Out. How Will My Mortgage Be Affected?

In 2023, the index used by some banks to calculate interest rates for adjustable-rate mortgages (ARMs) will be retired. If you have a fixed-rate loan or have recently refinanced, you will not be affected. If you have an ARM, this change may affect your loan. Here's a primer on what to expect.

Global banks use what's known as a benchmark interest rate as the basis for consumer loan rates around the world. For the past five decades, the most widely used of these benchmark rates was LIBOR, the London Interbank Offered Rate.

Many financial products used LIBOR as a benchmark rate, but adjustable-rate mortgages (ARMs) were the most common for mortgages.

Now LIBOR is being phased out. If you have a LIBOR-indexed adjustable-rate mortgage, here's what you should know.

What is happening to LIBOR?

In March 2021, the United Kingdom's Financial Conduct Authority (FCA), which regulates LIBOR, announced that the rate would cease to exist after June 30, 2023.

It also encouraged banks to transition away from using the rate by December 2021. At the direction of its regulator, Freddie Mac stopped originating LIBOR ARMs at the end of 2020.

What types of mortgages will be affected by the LIBOR transition?

The LIBOR transition will affect how interest rates are calculated for LIBOR-indexed adjustable-rate mortgages (ARMs).

If you're unsure what type of loan you have, start by reviewing your mortgage contract (also known as your "note") to determine whether you have an adjustable-rate mortgage. The contract should list which index is used to calculate the interest rate on your mortgage.

If it is LIBOR, you may want to call your lender or servicer for more information.

What will replace LIBOR as a benchmark rate?

In 2014, the U.S. Federal Reserve Board and the Federal Reserve Bank of New York created the Alternative Rates Reference Committee to review potential replacements for LIBOR. The committee recommended the Secured Overnight Financing Rate (SOFR) as a replacement.

Produced by the Federal Reserve Bank of New York, SOFR meets international benchmark standards and is published in a transparent, direct manner based on actual transactions in one of the largest and most active markets in the world. Freddie Mac deployed a SOFR-based ARM product at the end of 2020.

How do LIBOR or SOFR affect my interest rate?

For adjustable-rate mortgage loans, lenders typically calculate your interest rate using two numbers: the index and the margin.

The index is the benchmark rate that reflects market conditions. Both LIBOR and SOFR are indices.

The margin is the number of percentage points added to the index to get to your interest rate. Unlike the index number, which is based on market conditions, the margin is determined by your lender and is a judgment on your ability to repay the loan. The margin is set in your loan agreement and doesn't change after closing.

An easy way to think about it is this: Your mortgage interest rate = the index + the margin.

I have an adjustable-rate mortgage based on LIBOR. What do I need to know?

Once LIBOR officially ceases to be produced — on or after June 30, 2023 — the index on which your loan is based will change to SOFR. You'll receive a notice from your lender that this transition is happening.

Because LIBOR and SOFR are calculated differently, it's possible that SOFR will not match LIBOR when the transition occurs. It's even possible that your interest rate may change. But don't worry: the mortgage industry is working on a way to make sure there is minimal change to your monthly payment.

What can I do?

You do not need to take any action.

If you choose to keep your LIBOR-indexed ARM, once LIBOR is no longer available, your lender is required to inform you of the replacement index.

Another option is to act now by refinancing your mortgage to a fixed- or adjustable-rate loan that already uses a non-LIBOR index.

If you have questions about what to do, speak with your lender to determine what's best for your financial needs.

To learn more about mortgage rates and how they can affect housing costs, visit My Home by Freddie Mac^®.