If you are a homeowner who purchased your home with an Adjustable Rate Mortgage, you might wonder why your mortgage lender adjusts your interest rate based on the LIBOR index. What exactly is the LIBOR index? LIBOR stands for the London InterBank Offered Rate and is pronounced LIE-bore. The index is based on interest rates used by banks in London. Bank rates in London?! Why is my mortgage based on British interest rates?
Mortgage lenders in the United States like to use the LIBOR index for Adjustable Rate Mortgages because they frequently sell their loans to investors in the United Kingdom and Europe. European investors favor European financial indexes and mortgage lenders make more money offloading your loan overseas.
Should you be concerned that your Adjustable Rate Mortgage is tied to the LIBOR index? There isn’t really one index that’s better than any of the others when it comes to Adjustable Rate Mortgages. If you’re concerned that your mortgage lender will sell your loan overseas, consider choosing a mortgage based on one of the Treasury indexes. While some indexes can be more volatile than others you should concentrate on choosing a mortgage with the lowest margin instead of worrying about the index. Margin is the amount your lender marks up the index when adjusting your payments and directly affects your pocketbook.
You can learn more about your Adjustable Rate Mortgage options, including costly mistakes to avoid with a free mortgage tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
