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Loading...Loading...The Secured Overnight Financing Rate (SOFR) is a standard interest rate that is set based on overnight rates. Lenders use U.S. Treasury repurchase agreements to set rates on adjustable-rate mortgages and other loans.
SOFR stands for the Secured Overnight Financing Rate. It’s the interest rate that reflects what it costs banks and financial institutions to borrow cash from each other overnight, with U.S. Treasury securities serving as the collateral for those loans. That collateral piece is important. Because these transactions are backed by government securities, SOFR carries almost no credit risk, which makes it a cleaner measure of borrowing costs than the old system it replaced.
The Federal Reserve Bank of New York publishes SOFR every business day around 8:00 a.m. Eastern Time. The rate comes from actual transactions in the Treasury repurchase agreement market, where financial institutions buy and sell Treasury securities with agreements to reverse those trades the next day. This is a massive market. According to the Alternative Reference Rates Committee, the transaction volumes underlying SOFR regularly top $1 trillion per day.
So why does this matter to you as a home buyer or homeowner? If you have an adjustable-rate or you’re thinking about getting one, SOFR is the index your lender uses to determine your interest rate when it adjusts. When SOFR goes up, your ARM rate will usually go up too. When it drops, your rate can come down. That direct connection between a massive overnight lending market and your monthly mortgage payment is why it’s worth getting familiar with how this rate works.
SOFR is calculated as a volume-weighted median of three types of overnight Treasury repurchase agreement transactions. If you’re working with AmeriSave on an ARM, this is the index that will drive your rate. Let’s break the calculation down, because each piece feeds into the final number. This is where it helps to get a sense of the scale involved.
The Bank of New York Mellon runs the first group, which is made up of tri-party repo transactions. A third party takes care of the collateral and settlement between the borrower and the lender in a tri-party repo. The second group is General Collateral Finance repo transactions that the Fixed Income Clearing Corporation handles. These are contracts that are the same and are traded in a certain market segment. The third group is bilateral Treasury repo deals that the FICC's delivery-versus-payment service also clears. A single daily rate is made up of all three groups.
The Bank of New York Mellon and the U.S. Department of the Treasury's Office of Financial Research give this information to the New York Fed. Then it finds the volume-weighted median of all of those deals. That median method is intentional. It gets rid of trades that are very high or very low, so a few strange deals can't change the rate that affects millions of borrowers.
Once a day, the resulting rate is made public. The New York Fed also publishes 30-day, 90-day, and 180-day compounded averages of SOFR, in addition to the overnight rate. These longer averages smooth out the ups and downs that can happen in overnight markets from day to day. This is important for people with mortgages because most SOFR-based ARMs use the 30-day average as their index instead of the raw overnight number.
LIBOR, the London Interbank Offered Rate, served as the world’s most widely referenced benchmark rate for decades. At its peak, according to the Securities Industry and Financial Markets Association, roughly $223 trillion worth of financial contracts were tied to U.S. dollar LIBOR. That is not a typo. But the rate had a fundamental problem.
LIBOR was based on estimates, not actual transactions. A panel of banks would report what they believed they could borrow at, and those submissions got averaged into the published rate. That self-reporting structure made LIBOR vulnerable to manipulation, and manipulation is exactly what happened. Multiple banks got caught rigging their LIBOR submissions, which triggered billions in fines and a global push to find something better. You can see why regulators decided the whole system needed an overhaul.
In my experience working in capital markets and secondary markets for three decades, the LIBOR scandal was one of those moments that changed the industry permanently. You can’t have the foundation of the global financial system resting on what a handful of banks say they think they could borrow at. You need real numbers from real trades. That’s exactly what SOFR delivers.
The Alternative Reference Rates Committee selected SOFR as the preferred replacement in June of that year, and the Federal Reserve Bank of New York began publishing it in April of the following year. All remaining U.S. dollar LIBOR panel settings officially ceased in June of the year after that. AmeriSave, like all lenders, now uses SOFR as the benchmark for adjustable-rate products.
Understanding how these two benchmarks differ helps explain why the transition happened and what it means for your mortgage.
This is the biggest difference. SOFR is built on real overnight lending transactions worth over $1 trillion per day. LIBOR was built on estimates from a panel of banks. That volume gap made SOFR far more resistant to manipulation and far more reflective of actual market conditions. You get a number grounded in what actually happened yesterday, not what someone thinks could have happened.
SOFR is a secured rate. Every transaction behind it is collateralized by U.S. Treasury securities. LIBOR was unsecured, meaning the theoretical loans it measured had no collateral backing them. Because secured lending is less risky than unsecured lending, SOFR tends to run a bit lower than LIBOR did. Lenders account for that difference by adjusting their margins.
LIBOR came in multiple tenors, from overnight all the way out to twelve months. Each tenor was its own rate with its own submission process. SOFR is a single overnight rate, with compounded averages calculated on top of it for longer time periods. This makes SOFR simpler in its foundation, though the averaging methods for term rates add some complexity that lenders and capital markets teams have to manage. AmeriSave’s capital markets team monitors these averages daily so that borrowers get accurate, up-to-date rate information when they’re shopping for an ARM.
If you have a fixed-rate mortgage, SOFR’s daily movements won’t change your monthly payment. Your rate is locked for the life of the loan. But SOFR still matters, because it influences the broader interest rate environment, which affects the rate you’ll get when you first take out a fixed-rate loan or refinance into a new one. Lenders usually look at multiple benchmark rates when setting fixed mortgage pricing, and SOFR is one of the data points that can shape where those rates land.
The real impact lands on adjustable-rate mortgage borrowers. When your ARM’s fixed-rate period ends, your lender recalculates your interest rate using two numbers: the current SOFR value and a margin. The margin is set by your lender when you close on your loan, and it stays the same for the life of your mortgage. Your new rate is SOFR plus that margin.
Let’s say you have a 5/6 ARM, meaning the rate is fixed for the first five years and then adjusts every six months. Your lender’s margin is 2.75%. At your first adjustment, the 30-day average SOFR is 4.30%. Your new rate would be 4.30% + 2.75% = 7.05%. If six months later the 30-day average SOFR has dropped to 3.80%, your rate would recalculate to 3.80% + 2.75% = 6.55%.
On a $350,000 loan balance, that half-point drop from 7.05% to 6.55% would save you about $105 per month in principal and interest. That’s real money over the remaining life of the loan. This is why paying attention to SOFR trends matters if you’re carrying an ARM. At AmeriSave, we help borrowers think through these adjustments before they happen so there aren’t surprises when the rate resets.
Every ARM comes with rate caps that limit how much your interest rate can move. According to the Consumer Financial Protection Bureau, ARMs include three types of caps. The initial adjustment cap controls how much the rate can change at the first reset. The periodic adjustment cap sets the maximum change at each reset after that. The lifetime cap limits the total change over the loan’s full term. Common structures include a 2% initial cap, a 1% periodic cap, and a 5% lifetime cap. These caps give you a ceiling on your worst-case scenario.
Not everyone needs to track SOFR on a daily basis. Certain borrowers and home buyers, though, should get familiar with how this rate affects their financial picture.
If you currently have an ARM and your fixed-rate period is ending soon, you should watch the 30-day average SOFR closely. That number, combined with your margin, will determine your new monthly payment. You can find the current rate on the New York Fed’s website or through the FRED database maintained by the Federal Reserve Bank of St. Louis.
If you’re shopping for an ARM, compare the margins that different lenders offer. AmeriSave can walk you through how different margin levels affect your payments over various SOFR scenarios. A lower margin means your rate stays lower when SOFR moves, and that adds up over years of adjustments.
Home buyers weighing fixed-rate versus adjustable-rate options should think about their timeline. If you plan to sell or refinance within the initial fixed-rate period, the lower starting rate on an ARM can save you thousands of dollars. But if you’re staying put for the long haul, a fixed rate eliminates the uncertainty that comes with future SOFR movements. I’ve seen borrowers in Newport Beach and across the country approach this decision very differently based on whether they’re buying their forever home or planning a move within five to seven years.
The SOFR rate that is set overnight can change from day to day. That's normal. Overnight lending markets react to banks' short-term liquidity needs, their need to manage their balance sheets at the end of the quarter, and Treasury settlement activity. When institutions build up their reserves at the end of the quarter, you can usually see sharper moves. The New York Fed publishes compounded averages to make it easier for borrowers and lenders to compare rates.
The 30-day average SOFR is the most common index for ARMs on homes. Fannie Mae and Freddie Mac both use the 30-day average as the standard for adjustable-rate products that are based on SOFR. This means that when your ARM changes, your lender will look at the 30-day average SOFR instead of the overnight rate for that day.
More often than not, the 90-day and 180-day averages are used in business loans and other financial products. The SOFR Index shows how much compounding SOFR has affected the rate over time, starting from a baseline value set in April when the rate was first published. This index lets lenders figure out custom averages for any time period they want.
In the United States, SOFR is the benchmark rate that determines the price of adjustable-rate mortgages. It is based on more than $1 trillion in real daily transactions, which makes it a much stronger base than what came before. If you have an ARM or are thinking about getting one, make sure you know your margin, your rate caps, and the 30-day average SOFR before your adjustment date. AmeriSave can help you figure out how different interest rates will affect your monthly payment. Take the time to learn about this index. Depending on what you do, this is one of those things that can save you real money or cost you real money.
Secured Overnight Financing Rate is what SOFR stands for. Every business day at about 8:00 a.m. Eastern Time, the Federal Reserve Bank of New York publishes this rate. Overnight Treasury repurchase agreement transactions are used to figure out the rate. You can get historical SOFR data and daily updates from the New York Fed's website or the FRED database at the Federal Reserve Bank of St. Louis.
Because LIBOR was based on banks' self-reported borrowing rates instead of real transactions, it was easy for people to cheat. There is more than $1 trillion in actual daily repo market activity behind SOFR, which makes it much more clear and trustworthy. The Alternative Reference Rates Committee chose SOFR as the best replacement, and all U.S. dollar LIBOR panel settings are now officially over. SOFR is now the benchmark index for AmeriSave's adjustable-rate mortgage products.
Your lender adds a set margin to the current SOFR value to get your new interest rate when your ARM's fixed-rate period ends. Your payment goes up if SOFR goes up. Your payment will go down if SOFR goes down. Rate caps in your loan agreement say how much the rate can change each time it is adjusted. You can use AmeriSave's mortgage calculator to see how your payments might change by trying out different rate scenarios based on current SOFR trends.
If you have a fixed-rate mortgage, SOFR won't change your monthly payment. Your rate stays the same for the whole loan term once it is locked in. That being said, SOFR has an effect on the overall interest rate environment, which can change the fixed rate you get when you first apply. AmeriSave's current rates page can show you what's available for both fixed and adjustable loans right now if you're trying to decide between the two.
The Federal Reserve sets a target range for the federal funds rate, which is the rate banks charge each other for unsecured overnight loans to meet reserve requirements. SOFR tells you how much it costs to borrow money overnight with Treasury collateral. Both rates show how easy it is to borrow money overnight, but they follow different markets. SOFR is usually a little lower because the collateral behind it makes it less risky for the lender. You can use the Federal Reserve's data tools to keep an eye on both rates.
The 30-day average SOFR is the average of the daily overnight SOFR rates over the last 30 days, with interest added. This is the standard index that Fannie Mae and Freddie Mac use to buy adjustable-rate mortgages that are based on SOFR. This averaging makes rate spikes less noticeable from day to day. When your ARM changes, your lender will usually use this 30-day average instead of the overnight rate. Look at AmeriSave's ARM options to see how these averages affect your rate and payment.
SOFR is much less likely to be manipulated. LIBOR was based on estimates from a small group of banks that reported their own numbers, which made it easy for some traders to cheat. SOFR is based on a volume-weighted median of real repo market transactions that happen every day and are worth more than $1 trillion. Because there are so many transactions and the collateral is safe, it's very hard for any one institution to change the rate. The Consumer Financial Protection Bureau has information on how indexes like SOFR affect your mortgage terms.
To begin, look for two numbers: the margin on your loan, which is written in your mortgage note, and the rate caps for the first adjustment, periodic adjustments, and lifetime limit. After that, look at the SOFR average for the last 30 days. To figure out your new rate, add your margin to the average SOFR. Check your rate caps to make sure the calculated rate doesn't go over the cap limits. AmeriSave's team can help you figure out whether refinancing into a fixed rate makes sense for your situation if you need help with these numbers.
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