LIBOR

LIBOR is the London Interbank Offered Rate. LIBOR is the rate charged by one bank to another for lending money. The LIBOR is an international index that follows world economic conditions. LIBOR-indexed ARMs (Adjustable Rate Mortgages) offer borrowers aggressive initial rates and have proven to be competitive with popular ARM indexes like the Treasury bill.

With the LIBOR ARMs borrowers are generally protected from wide fluctuations in interest rates by periodic and lifetime interest rate caps.

Compared to other Indexes, LIBOR is one of the least stable. It changes more often and by greater amounts

Most adjustable rate mortgages that are tied to the LIBOR index, are based on the six-month LIBOR rate.

With a traditional mortgage, if the LIBOR index or other index goes up, the mortgage rate rises with it, only much more frequently.

If you are considering an ARM that is indexed of the LIBOR index ask your mortgage broker for alternative indexes for your mortgage program. There are more stable indexes such as the COFI index and the COSI index.

Typically this index is the quickest to rise when prices of mortgage backed securities are rallying but its the slowest to decline compared to other economic indices.

One can always imagine a train when looking at the various indices. The LIBOR is the coal car (just behind the engines of the various government central banks), the COFI and COSI are situated in the caboose area. As the train goes up over hill and down the other side, the LIBOR is leading the way, the COFI and COSI are always in the back mimicking the LIBOR but with a several month lag time.

The LIBOR Adjustable rate is the opposite of the London Interbank Bid Rate (LIBID).

LIBOR index mortgages are a favorite of foreign nationals and American investors with substantial foreign currency holdings.

The LIBOR index is one of several indexes used in adjustable rate mortgage (ARM) loan products. An interest rate is added to the index to arrive at your final rate. When your rate adjusts, the index will be incorporated to determine your new rate.

» DISCLAIMER: The information contained in this article on 'LIBOR' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.