LIBOR Index – What is it?
LIBOR Index – What is It?
London Inter-Bank Offered Rate (LIBOR)
LIBOR Index is the rate of interest that member banks of the British Bankers’ Association charge when they lend money to one another in the wholesale money markets in London, somewhat similar to our Fed Funds Rate. In fact, the LIBOR Index tends to closely track the US Fed Funds Rate. LIBOR Index is a standard financial index that is used globally and in US capital markets. The Wall Street Journal publishes the LIBOR index on a daily basis.
In general, changes in the LIBOR Index have tended to be smaller than changes in the Prime Rate. There are several LIBOR maturities much like U.S. Treasuries, but the 1-month and 6 month are the most readily used and available LIBOR indexes for mortgage loans. Although they are becoming increasingly more common in use for consumer loans and ARMs, LIBOR Indices have traditionally been a reference figure for corporate and commercial financial transactions.
LIBOR Index Summary:
Over the past several years, the LIBOR has slowly begun to replace the more commonly used 1-year T-bill index as the index of choice for hybrid ARMs such as 3-, 5-, 7-, and 10 year products to determine the Fully Indexed Rate at their adjustment periods. It is very established and dependable, yet it does carry a risk of slightly larger volatility when the US Dollar fluctuates. This is due to the fact that LIBOR is a European based index and reacts to the dollar strengthening or weakening much like the Euro becoming more valuable or less valuable to the dollar in slowing and expanding economic situations. The shorter term LIBOR products are great in a Fed easing cycle, but should be used cautiously and possibly avoided when the Fed is hiking short-term rates, as the LIBOR index could rise very quickly. In these situations, a better option may be the 3 or 5 year Hybrid LIBOR ARMs.
LIBOR Index – Who is it ideally suited for?
The LIBOR index is ideally suited for the more aggressive borrowers on the 1 month and 6 month products as it will tend to fall faster than any other index and yet also rise as fast as the Fed hikes interest rates in rising markets and sometimes even faster depending on currency conditions. The key here is the margin. Some investors offer buy downs into the low 1% range for this product and can make it a very attractive choice when looking at a ten year chart with your mortgage planner. Hybrid ARMs such as the 3-, 5-, 7-, and 10-year products that use the LIBOR for the change rate at adjustment time can have a wide variety of use depending on your desired length of time in your home and your other specific needs and goals.
John R. Thomas – NMLS 38783
Certified Mortgage Planner – Primary Residential Mortgage, Inc.
302-703-0727 DE Office / 610-906-3109 PA Office / 410-412-3319 MD Office
248 E Chestnut Hill Rd, Newark, DE 19713