LIBOR Mortgage Loans
All adjustable rate mortgages (ARMs) use an index (or base rate) to determine borrowers’ interest rates. Many different indexes are available (COFI, MTA, Prime Rate, CMT, T-Bill, etc.), each with its own advantages and disadvantages.
Why Would A Borrower Want a LIBOR Based Loan?
Some Adjustable Rate Mortgages (ARMs) are based on the London Inter-Bank Offering Rate (LIBOR) index. The LIBOR is an average of the interest rates that international banks charge each other to borrow US dollars (dollar-denominated deposits, or “Eurodollars”) in the London market. The LIBOR interest rate is often used as the base index for ARM loans that have short-term adjustment periods. Various LIBOR loan rates can be used as ARM indexes (e.g. – 1-month, 3-month, 1-year), but the most commonly used is the 6-month LIBOR rate. During periods of low interest rates, a LIBOR based loan is uncommonly low. This is great for borrowers with short term real estate goals or for those who are comfortable with risk. As interest rates rise, a LIBOR loan keeps pace and can be very dangerous for borrowers trying to make their monthly payments.
The LIBOR is one of many international indices, and it follows the world marketplace, fluctuating with international economic conditions. The LIBOR is most comparable to the 1-year Constant Maturity Treasury (CMT) index and tends to be more variable than COFI (11th District Cost of Funds Index) rates. The LIBOR index (particularly 1- and 6-month LIBOR) is generally considered to be one of the better ARM indices, keeping pace with popular options like the COFI, the 6-month T-Bill, the 6-month CD, and the MTA.
Lenders use the LIBOR rate as listed by Fannie Mae (FM LIBOR) or by the Wall Street Journal (WSJ LIBOR). The Fannie Mae LIBOR rates are posted on the Fannie Mae website (www.fanniemae.com) and are updated by the last working day of the month. The LIBOR rates published daily by the Wall Street Journal are copied from the British Bankers’ Association (BBA) listings. More information about the BBA LIBOR (how it is calculated, rates history, etc.) can be found on their website. When providing a LIBOR-indexed ARM, mortgage lenders must state to borrowers which LIBOR listing they are using.
LIBOR Mortgage Loan Rates
The LIBOR index is a particularly attractive option right now (June 2005), as the current LIBOR rate is currently low, and LIBOR rates have a history of being fairly stable and reasonable. In addition, most LIBOR ARMs are offered without points. LIBOR-indexed ARMs offer borrowers aggressive introductory rates (lower than other ARMs) as well. Of course, as with all adjustable rate mortgages, as the index increases or decreases, so will the interest rates tied to it. However, the historical LIBOR rate is slow-moving, and thus relatively stable (without sudden spikes or troughs). Furthermore, LIBOR ARMs borrowers are usually protected by periodic and lifetime interest rate caps, and LIBOR ARMs generally do not involve negative amortization. Common types of LIBOR include the daily libor, 30 day libor and 6 month libor.
