How Rates Are Set for Adjustable Rate Mortgages
When you’re selecting a mortgage, one of the most important aspects to consider is the interest rate. With an adjustable rate mortgage (ARM), your interest rate will change over time, and it can be helpful to understand how the rate is set and what drives those changes.
About the Interest Rate Index
The interest rate banks charge for an ARM is typically calculated based on what’s called an interest rate index. For decades, major global banks have used the London Interbank Offered Rate, or LIBOR, as the index for mortgages – as well as government and corporate bonds, student loans, credit cards, derivatives and other financial products.
Now, many U.S. banks are switching from the 1-year LIBOR index to a new index – the Secured Overnight Financing Rate (SOFR). KeyBank began using the 30-day average of SOFR as the index for adjustable rate mortgages on August 15, 2020.
Here’s What This Means for Our ARMs and for You Moving Forward
- Same fixed rate period. Our fixed rate periods, the time during which your mortgage interest rate remains the same, are unchanged at 10, seven and five years. These long, fixed-rate term options can help you more easily plan budgets around this schedule.
- Comparable payments. A borrower’s overall variable-rate payment with SOFR will be comparable to that of an existing LIBOR-based ARM.
- New 6-month adjustments. To help keep SOFR-indexed ARM rates consistent with other competitive rates in the market, the variable rate adjustment period will be every six months. This means your monthly variable-rate payment will adjust every six months after the fixed-rate period ends. This 6-month adjustment is why you’ll now see KeyBank ARMs referred to as 10/6 mo., 7/6 mo. and 5/6 mo.
- Lower cap for adjustments. The periodic adjustment cap, which is the maximum adjustment of an interest rate allowed during a particular period of an ARM, will decrease from 2% to 1%. This lower cap will protect you from significant and unexpected payment increases. Under SOFR, even in a period of rapidly rising interest rates, a borrower’s payment would not change by more than 2% over a 12-month period.
If you have any questions or want to learn more about a new mortgage, contact us at 1-888-KEY-0018. If you have questions about your existing KeyBank adjustable rate mortgage, please contact our Mortgage Customer Service team at 1-800-422-2442. (For clients using a TDD/TTY device: 1-800-539-8336).
