SOFR
Secured Overnight Financing Rate — a benchmark interest rate for dollar-denominated derivatives and loans, replacing LIBOR as the primary reference rate.
Example
“The floating rate loan transitioned from LIBOR + 2% to SOFR + 2% as LIBOR was phased out in 2023.”
Memory Tip
SOFR = replaced LIBOR as the main US benchmark rate. Based on actual overnight repo transactions.
Why It Matters
SOFR affects the interest rates you pay on adjustable-rate mortgages, home equity lines of credit, and variable-rate loans. Understanding SOFR helps you anticipate how your monthly payments might change when rates shift, allowing you to budget more effectively and make informed decisions about whether to lock in fixed rates.
Common Misconception
Many people believe SOFR is a fixed number that stays the same, but it actually changes daily based on overnight lending activity in the market. This means your variable-rate loan payments can fluctuate regularly, not remain constant throughout your loan term.
In Practice
If you have an adjustable-rate mortgage with a rate tied to SOFR plus 2.5 percent and SOFR is currently at 5.3 percent, your rate would be 7.8 percent. If SOFR rises to 5.8 percent next month, your rate increases to 8.3 percent, potentially raising your monthly payment by several hundred dollars depending on your loan balance.
Etymology
Acronym for Secured Overnight Financing Rate. A SECURED (collateralized) OVERNIGHT FINANCING RATE.
Common Misspellings
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