LIBOR stands for the London Interbank Offered Rate, which is an Index, or “reference rate”, that relfects the rate of interest offered by banks when trading unsecured funds with one another in the London money markets. This is the same concept as what the Prime rate is to the US Economy. So if your loan happens to be tied to the LIBOR index, you can gauge what direction your loan may move on its next adjustment schedule.
Many ARMs (Adjustable Rate Mortgages) are tied to the LIBOR Index, and in this case, the negative or positive movement of your monthly payment rate will be determined by the LIBOR activity. The Originator of the mortgage typically has the option to choose between a 1 month, 3 month, 6 month, and 1 year LIBOR depending on which lender they are working with. The number of months tied to your LIBOR represent the number of month’s adjustments which are averaged to come up with the specific rate. So even though rates change daily, your adjustment rate will be based on an average of anywhere from 1-12 months of LIBOR activity.
To determine what specific index your ARM is attached to, you can reference your mortgage note, where the details of your rate and index will be attached via the “ Adjustable Rate Rider”.
LIBOR Stands for London Inter Bank Offer Rate. It’s definition? In short it is an index that measures money. Specifically it measures the rate of interest international banks charge to lend each other money. Similar to the US Federal Funds rate which currently stands at 1.5%.
In addition there are different terms for the LIBOR. You have 1 month, 3 month, 6 month and 1 yr indexes. These indexes changed daily and sometimes wildly as witnessed in the last few days. For example the 6 month LIBOR rose over 400 basis points last week! (that’s 4%)