Bankrate: Home Equity Borrowers Must Keep 2021 LIBOR Sunset in Mind

The London Interbank Offered Rate (LIBOR) index is set to expire at the end of 2021, and this approaching eventuality is something that home equity borrowers generally — including reverse mortgage borrowers — should keep in mind as a new rate index is poised to take LIBOR’s place. This is according to a new column published this week in Bankrate.

“For decades, the rates on many of those loans — and a variety of other financial products — were determined by an index called the London Interbank Overnight Rate (LIBOR),” the column reads. “But that’s being phased out in favor of a new index called the Secured Overnight Financing Rate (SOFR).”

While SOFR has not been finalized as the replacement index for reverse mortgages, analysts recently expressed to RMD that SOFR was the “likely” replacement index for Home Equity Conversion Mortgages (HECMs), though it is not yet confirmed. Another index, like Constant Maturity Treasury (CMT), is still technically a possibility.

For those who are curious about how they may be impacted by the LIBOR sunset, it may be prudent to check your loan documents to determine what rate index is currently applied to a borrower’s loan, the article reads.

“If you have an adjustable-rate mortgage, a home equity line of credit or a reverse mortgage (HECM), it’s probably a good time to check with your servicer about which index your loan is tied to, because it could affect your rate the next time you’re due for an adjustment,” the column reads. “That huge stack of documents you signed for the loan will have the index listed there.”

Those borrowers who have loans tied to other indexes likely need not be concerned, as many adjustable-rate products have fallen out of favor in the wake of the 2008 financial crisis. This is not the case for most people who have either Home Equity Lines of Credit (HELOCs) or reverse mortgages, however, they may be affected. However, the Alternative Reference Rates Committee (ARRC) — the organization charged with developing the replacement indices — is focusing on an effort to make the transition seamless.

“The idea is LIBOR plus X should roughly equal SOFR plus Y,” says Jay Bacow, head of agency mortgage research at Morgan Stanley to Bankrate. “It’s not going to be identical but within the margin of a homeowner’s perspective, it should be a pretty minimal difference.”

The bottom line is that reverse mortgage customers should likely try to check ahead of time to determine whether or not they will be impacted by the change when it takes place, the article says, which is likely to be the case for borrowers of adjustable-rate mortgages, home equity loans and reverse mortgages.

“[…] If it’s a LIBOR-based loan, you may want to speak to your lender about when it will change over and what that could mean in your individual situation,” the article says.

Read the article at Bankrate.

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