Libor Vs. Traditional Mortgages

Libor is short for the London InterBank Offered Rate, which is the interest rate offered for U.S. dollar deposits by a group of large London banks. These rates are typically quoted for 1-month, 3-month, 6-month and 12-month deposits. A Libor mortgage is an adjustable rate mortgage on which the interest rate is tied to a specific Libor. The Libor ARMs were developed for foreign investors looking to minimize their interest rate risk on dollar-denominated investments.

Libor ARMs themselves are very similar to traditional ARMs in that they have an initial rate period, ranging from 6 months to 10 years, along with a subsequent adjustment period. They also typically contain both a rate adjustment cap and a maximum interest rate in order to ensure that loans are affordable if things chance too much in the future. The main difference between a Libor ARMs and traditional ARMs are often more attractive buydowns, no negative amortization, and high index volatility.

Libor ARMs can be attractive not only because it uses Libor but because it can also contain a number of other features that can benefit you. Attractive ARMs are those in which the early interest savings outweigh the risk of interest rate and payment increases later on. This is typically measured by creating an interset rate scenario analysis in which you make several assumptions about future interest rates.

In the end, these can be a great selection in some cases while in others you may be better off with a traditional ARM. Regardless, it is definitely a consideration that should be made when finding a mortgage that best suits your needs!

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