What the heck is LIBOR and what does it have to do with my adjustable rate mortgage?
LIBOR is the most common index for US adjustable rate mortgages. It is seen most often in hybrid ARM’s, loans with a fixed period that switch to a variable at the end of the fixed period. While less common, it is seen in Option ARM mortgages as well, especially those originated in 2003 and 2004 when LIBOR fell as low as 1.00%.
When most people learn that LIBOR stands for London Interbank Offering Rate they want to know why in the world it would be used to determine the rate on their home loan in the US. I could go in to great detail as to why this is, but fortunately Business Week did the heavy lifting for me this week.
The Lowdown on LIBOR - BusinessWeek - 5.29.2008
In this quick article, BW explains:
- What exactly is LIBOR?
- What does LIBOR have to do with me?
- What’s the recent controversy about? (If you didn’t know, European banks have been accused of manipulating LIBOR lower over the last several months. The article explains why and how it can affect you.)
- Do I need to worry if my loan is pegged to Libor?
Over the long run, hybrid adjustable rates can save mortgage borrowers a lot of money. The LIBOR is a mystery to most homeowners even when their mortgage rate depends on it. Take a few minutes to acquaint yourself with the index and feel free to comment or call if you have any questions.