What is SOFR and How It Affects Your Mortgage

SOFR replaced LIBOR as a key benchmark for variable-rate loans. Here's what it means for your mortgage payments.

By Garret Merkley · Explainer · Jun 29, 2026

Branched from Understanding Interest Rate Indexes and Margins on Variable Loans

Quick take

SOFR (Secured Overnight Financing Rate) is a benchmark interest rate for overnight borrowing, collateralized by U.S. Treasury securities.
It replaced LIBOR as the primary index for many variable-rate financial products, including some mortgages.
For homeowners with SOFR-indexed mortgages, changes in SOFR directly influence their monthly interest payments.
SOFR is considered more transparent and robust than LIBOR because it's based on actual market transactions.

SOFR, or the Secured Overnight Financing Rate, is a benchmark interest rate that reflects the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. Administered by the Federal Reserve Bank of New York, it has become the primary replacement for the discredited LIBOR (London Interbank Offered Rate) across a wide range of financial products, including many variable-rate mortgages.

Why SOFR Replaced LIBOR

For decades, LIBOR was the most widely used benchmark for trillions of dollars in loans and derivatives globally. However, it was based on estimates submitted by banks, which made it susceptible to manipulation. Following scandals and a lack of actual underlying transactions, regulators mandated its phase-out. SOFR was chosen as a robust alternative because it’s based on actual, observable transactions in the Treasury repurchase (repo) market, making it more transparent and less prone to manipulation. This shift aims to create a more stable and reliable financial system.

How SOFR Works in Your Mortgage

If you have an adjustable-rate mortgage (ARM) or are considering one, its interest rate might be tied to SOFR. Here’s how it generally works:

**The Index + The Margin:** Your mortgage interest rate is typically calculated as the SOFR index plus a fixed amount called the "margin." For example, if SOFR is 3.5% and your margin is 2%, your interest rate would be 5.5%.
**Rate Adjustments:** Unlike fixed-rate mortgages, the interest rate on a SOFR-indexed ARM doesn't stay the same. It adjusts periodically (e.g., every six months or once a year) based on the current SOFR rate at the time of adjustment.
**Impact on Payments:** When SOFR rises, your interest rate increases, leading to higher monthly mortgage payments (within any applicable caps). Conversely, if SOFR falls, your rate and payments will decrease.
**Secured Transactions:** The "Secured" part of SOFR refers to the fact that the overnight borrowing is backed by U.S. Treasury securities. This makes the rate very low-risk and reflective of fundamental market conditions.

Why SOFR Matters to Homeowners

Understanding SOFR is crucial for anyone with, or considering, an adjustable-rate mortgage. It directly impacts the affordability and predictability of your monthly housing costs. Because SOFR is based on real transactions, it offers greater transparency and stability than LIBOR, reducing the risk of unexpected shifts due to manipulation. Monitoring trends in SOFR, often influenced by the Federal Reserve's monetary policy, can help you anticipate potential changes in your mortgage payments and make informed financial decisions, such as whether to refinance or budget for higher costs.

Does SOFR affect fixed-rate mortgages?

No, SOFR only impacts variable-rate loans, such as adjustable-rate mortgages (ARMs), that are specifically indexed to it. Fixed-rate mortgages have an interest rate that remains constant for the life of the loan.

Is SOFR always lower than LIBOR was?

Not necessarily. SOFR and LIBOR reflect different underlying markets and dynamics. While SOFR has historically been lower than LIBOR, their relationship can change based on market conditions. The key difference is SOFR's transparency and reliability.

How often does SOFR change?

SOFR is published daily by the Federal Reserve Bank of New York. However, your mortgage's interest rate adjustments will only occur at the intervals specified in your loan agreement, typically every six months or once a year, not daily.

What is "SOFR + margin"?

Your adjustable mortgage rate is calculated by adding a fixed percentage (the "margin") to the SOFR index. The margin is set at the time you take out the loan and typically doesn't change, while the SOFR index fluctuates.