What is SOFR?
SOFR is an acronym for Secured Overnight Finance Rate. It is an interest rate that is based upon the cost of borrowing overnight for banks, which in turn is defined by the United States Treasury’s repurchase agreements.
SOFR was introduced in 2017 and designed to be a replacement for LIBOR, which is the London Interbank Offered Rate. While LIBOR used to be the index used as a benchmark when determining interest rates for credit agreements, SOFR has essentially replaced that index and is now the standard for most major financial institutions.
How Does SOFR Work?
SOFR is a financial index that can seem complex and difficult to understand. But, essentially, the SOFR index is largely determined by actual financial transactions and the rates at which large banks lend each other money in the short-term. Treasury bond repurchase agreements, also known as repos, enable banks to make overnight loans in order to boost liquidity and meet reserve regulations. The SOFR calculates the weighted average of these overnight loans and the rates charged for them, and generates figures based on those transactions.
What is a SOFR Loan?
A SOFR loan is an adjustable rate mortgage in which the interest rate remains fixed for a specific period of time. With an adjustable rate mortgage, you’re often able to secure a low interest rate for a number of years before and once this introductory period ends, the interest rate adjusts based on the SOFR index.
What this means for you as a borrower is that your interest rate can go up or down depending on the SOFR index and market conditions. With a 6 month SOFR loan, your rate will be adjusted every 6 months based on the index. Keep in mind that there’s a cap on the amount your interest rate can rise, so, even with an adjustable rate mortgage, your interest rate can’t keep rising indefinitely.
Benefits of a SOFR Loan
There are several benefits associated with taking out a 6 month SOFR loan. These benefits include, but are not limited to, the following:
- You can access lower upfront interest rates.
- You can potentially capitalize on falling interest rates without having to refinance.
- You can benefit if you don’t plan to stay in your home for long. This is because you can take advantage of the low interest introductory period and sell the home before interest rates adjust.
Types of 6 Month SOFR Loans Available From Griffin Funding
Griffin Funding offers 6 month SOFR loans for the following loan types:
- DSCR loans: A debt service coverage ratio loan is a type of non-QM loan that real estate investors can use. It allows an investor to qualify based on the debt service coverage ratio (DSCR) rather than other traditional financial metrics.
- Bank statement loan: A bank statement loan is one in which the borrower uses their bank statement as proof of income in lieu of a tax return or a W-2.
- Asset-based loans: An asset-based loan that utilizes assets as part of the proof of income when applying for a home loan. This asset is used as collateral and can be seized if the loan is defaulted on.
As you can see, at Griffin Funding we offer a variety of 6 month SOFR ARMs. A 3/6 SOFR ARM is a loan that remains fixed for a period of three years, then is adjusted every six months. Griffin Funding also offers these in 5/6, 7/6, and 10/6 options.
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6-Month SOFR Loan FAQs
What is the 6-Month SOFR Rate?
According to the Federal Reserve Bank of New York, as of June 30, 2022, the SOFR rate is 1.5%. Keep in mind that the SOFR rate often changes on a daily basis and 6 month SOFR loans are based on 30 day averages of the SOFR index.
What is an adjustable rate mortgage?
An adjustable rate mortgage (ARM) is a type of home loan where the interest rate adjusts over periods of time. The current rate figures depend on the current status of the market in the United States. This rate will be different every time the period is up. Once again, the new rate will depend on the market.
A fixed-rate mortgage is different from an ARM in that there is a locked-in interest payment throughout the duration of that loan. Even when the interest rates in the market change, the fixed-rate mortgage amount stays constant.
Is a SOFR loan better than a conventional loan?
The best type of loan for you depends on your unique situation. Both types of loans have advantages. The key is in knowing which of these is better based on your goals and circumstances. To determine which is better, you might want to consider your current financial condition, your current and projected future income, and your personal preferences.
Risk tolerance also plays a major role in whether a conventional loan or SOFR loan is better for you. While SOFR loans can be riskier due to changing interest rates, they provide an opportunity to potentially save money on your interest rate. If you have a low risk tolerance, then a conventional loan with a fixed—albeit possibly higher—interest rate may be for you.
One last factor in determining which loan is right for you is your projected economic status. This is important because if interest rates go sky-high in the future, so will your home payments. On the other hand, if interest rates drop, your payment will in turn be lower.
If you want help in deciding which loan option is right for your needs, speak with the experts at Griffin Funding today. We can present you with a wide array of options and walk you through the process of applying for the financing you need to achieve your real estate goals.