LIBOR
Basic explanation of the LIBOR
If you're thinking of getting an adjustable rate mortgage you'll want to learn about LIBOR. The reason is, most adjustable rate mortgages are based on the LIBOR Index. Fixed rate home loans are not based on an index. What is LIBOR? The London Interbank Offered Rate, and it is the rate charged by one bank to another bank for lending. The LIBOR changes frequently and most financial websites provide updated information on rate changes.
LIBOR Terms:
1. 1 Month LIBOR
2. 3 Month LIBOR
3. 6 Month LIBOR
4. 1 Year LIBOR
Some adjustable rate mortgages are based on other indexes like the MTA, but most are based on the LIBOR. This is important to you because your adjustable rate mortgage starts off at a "teaser rate" but after it's fixed teaser rate period the interest rate will adjust. The rate it will adjust to is based on the index the loan is based on and the margin that is applied to the loan. Most "A" paper banks have a margin of 1.5% to 2.5% and most non-prime banks have margins that are much higher. When your loan adjusts it will add your margin plus the current value of the LIBOR index and it almost always will result in a higher interest rate and payment.
Kevin O'Connor
Mortgage Consultant
www.koloans.com
800.550.5538
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