What is LIBOR?
The London Interbank Offered Rate (LIBOR) is an index used to adjust the interest on some of our adjustable-rate mortgage (ARM) products and is used by First Tech and other lenders today.
The LIBOR index is being discontinued industry-wide on or before December 31, 2021. First Tech has begun implementation to convert all adjustable-rate mortgage products to the CMT (Constant Maturity Treasury) index. This disclosure shares what you need to know about LIBOR and any potential changes that could impact your loan.
What is an index?
When the interest rate on an adjustable-rate mortgage is adjusted, the new interest rate is made up of two parts: the index and the margin. The index is a broad measure of interest rates, and the margin is an extra amount that the lender adds to establish the new interest rate on the loan. The index and the amount of the margin are specified in the documents signed at loan closing. In most circumstances, your interest rate and monthly payments will also change if the index rate changes during the term of the loan.
What is an Adjustable-Rate Mortgage loan?
An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways. Most importantly, with a fixed-rate mortgage, the interest rate and the monthly payment of principal and interest remain constant during the life of the loan. With an adjustable-rate mortgage, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
When is this effective?
First Tech will begin utilizing the CMT Index for newly originated adjustable-rate mortgage loans on May 11, 2020. Existing applications with a new rate lock and/or valid Change of Circumstance will move to the CMT index. All other existing applications with an existing rate lock dated prior to May 11, 2020 and that do not have a Change of Circumstance will fund with the LIBOR index.
What you need to know.
An alternative published index will be selected consistent with the terms of your Note. If an alternative index is put in place, customers with LIBOR-based adjustable-rate mortgages will be contacted with the details of any relevant changes affecting their loans. We want you to know that the alternative index may behave differently than LIBOR has historically behaved. Any index changes will not change most other terms of your adjustable-rate mortgage, such as the maximum interest rate you may pay during the term of the loan or the timing of any interest rate resets.
We’re here for you.
A Mortgage is a substantial investment. We want you to have confidence in the loan you choose. An adjustable-rate mortgage may still be a good option for you. If you have concerns about getting an adjustable-rate mortgage because of the possible index change, your home mortgage consultant would be happy to discuss other mortgage products with you.
For general information on the adjustable-rate mortgages, see the Consumer Handbook on Adjustable-Rate Mortgages, which is maintained by the Consumer Financial Protection Bureau and is available at: https://files.consumerfinance.gov/f/201401_cfpb_booklet_charm.pdf.
For more information on the possible discontinuation of LIBOR, see the Alternative Reference Rates Committee Website, which is maintained by the Federal Reserve Bank of New York and is available at: https://www.newyorkfed.org/arrc.