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What is LIBOR Index and why to go for LIBOR Rate ARM?

Posted on: 07th Apr, 2004 02:38 am
When you are looking for an ARM wherein the interest rate and payments won't fluctuate over a wide range, you may choose one which is tied to the LIBOR Index. In this article, you can check out the definition of LIBOR and related topics as given below:

What is LIBOR Index?

LIBOR stands for "London Interbank Offered Rate". It is the average of the interest rates on US dollar deposits that a group of banks in the London money market borrow from one another. This Index is calculated on the basis of currency rates, time and maturity. It is calculated by the British Banker's Association.

The LIBOR Index is often used as the reference rate for adjustable rate mortgage and short term unsecured loans in the US financial markets. So far, the variations in the LIBOR interest rates are small as compared to that of the Prime Rate.

There are different types of LIBOR indexes such as 1 month, 3 month, 6 month, and 12 months LIBOR index. LIBOR interest rates are just as volatile as interest rates on short term US government security. However, compared to other ARM indexes such as COFI, MTA and CODI, the LIBOR interest rate is more volatile.

What is LIBOR Index ARM?

A LIBOR ARM is an adjustable rate mortgage which has an indexed rate based on the LIBOR index. When added to the margin, the LIBOR Index gives the Indexed rate of such ARMs.

Why should you opt for LIBOR Index ARM?

Here are the top 5 reasons why you should go for LIBOR ARM.
  1. Avoid negative amortization: LIBOR rates protect you from negative amortization due to availability of periodic and lifetime rate caps.

  2. Attractive rate buydown: 30 year LIBOR ARMs can allow you to buydown the interest rate and margin by 1/4% for only 3/8 th of a point unlike in a 30 year fixed rate loan wherein one can buydown the rate by 1/4% for 1.5 points.

  3. Low margin: A potential borrower can expect to get a low margin on the LIBOR ARM as compared to other adjustable rate loans. However, for subprime loans, the margins and LIBOR rates may be higher. This depends more on the creditworthiness or risk level of the borrower.

  4. Aggressive low rates: LIBOR index ARMs are available at comparatively lower rates than adjustable rate mortgages tied to other indexes such as the COFI, 6-Month Treasury Bill and the 6-Month Certificate of Deposit.

  5. Avoid wide rate fluctuations: LIBOR ARMs protect you from wide fluctuations in the interest rate through periodic and lifetime rate caps.

What are the features of LIBOR rate ARMs?

Some of the common features of ARMs with LIBOR rate index are:
  • Initial rate period: The initial rate remains fixed for a period of 6 months to 10 years.
  • Adjustment Interval: This is the period between rate adjustments after the first rate adjustment takes place. LIBOR rates often adjust after every 6 months to 1 year.
  • Maximum Rate: The highest interest rate that LIBOR ARMs can have over its entire life is usually 5-6% higher than the initial low rate.
  • Rate Caps: Usually 6 month LIBOR Index loan has a rate cap of 1% whereas 1 year and 3 year LIBOR Index loans have 2% cap. There are some 5 year LIBOR rate ARMs in which the rate cap is similar to that of 1 year and 3 year LIBOR rate loans while there are others on which the cap is same as that of 7 year and 10 year LIBOR loans.

What are the types of LIBOR ARMs?

The different types of LIBOR rate loans available are:
  • 1 month LIBOR ARM: The index linked to this loan fluctuates each month as a result of which your payment changes on a monthly basis.

  • 3/1 ARM: The initial rate is fixed for a period of 3 years after which the rate is adjusted every year on the basis of the LIBOR Index.

  • 5/1 ARM: The interest rate remains fixed for 5 years after which the rates adjust annually with changes in the LIBOR Index.

  • 7/6 ARM: This is a loan option wherein the initial rate is fixed for 7 years after which the LIBOR rate adjusts every 6 months.

  • 10/6 ARM: Here the interest rate remains fixed for the first 10 years at the end of which the LIBOR rates adjust every 6 months.

What type of property is eligible for the loan?

The property types on which lenders offer ARMs with LIBOR rates include:
  • 1-4 unit primary residence such as condo, PUDs and mobile homes
  • 1-4 unit investment property
  • Second homes
If you're planning to move out of property within the fixed rate period of an ARM, you can opt for LIBOR ARM which is a flexible loan option. The LIBOR Index ARM is especially suitable for first time buyers who'll be able to save in interest due to low initial rates and monthly payments.
1 year LIBOR Index for last 10 months have been given below:

3 Mths LIBOR
6 Mths LIBOR
1year LIBOR
Jul, 05
Aug, 05
Sep, 05
Oct, 05
Nov, 05
Dec, 05
Jan, 06
Feb, 06
Mar, 06
Apr, 06
May, 06
Jun, 06

Libor Index
Posted on: 07th Dec, 2005 07:57 pm

Posted on: 20th Aug, 2008 04:56 am
Hi P. Krishna rajan,

You'll get the past 10 years trends in LIBOR Rates from ""
Posted on: 22nd Aug, 2008 04:03 am
we currently have interest only for 7 years. the monthly statment we receive after paying mortgage payment every month, shows 7/1 libor.
what does the 7/1 libor mean? :wink:
Posted on: 20th Dec, 2008 12:45 pm
Hi mo,

7/1 libor means that the initial rate is fixed for 7 years after which the LIBOR rate adjusts every 1 year. Thus, once you complete 7 years of your loan term, the rate will adjust after every 1 year for the remaining loan period.


Posted on: 22nd Dec, 2008 12:32 am
what were the libor rates for the past ten years
Posted on: 06th Jan, 2009 05:59 am
Hi peter salvatore

You can visit the following link and get to know about the libor rates of the past years as well as the future trends that you can expect:

Posted on: 07th Jan, 2009 02:25 am

To add a little more detail to what has already been explained....

Your 7/1 ARM has a margin. Look on your statement and see if you can find it. When the 7 years is up, the bank is going to take the current LIBOR rate, add the margin to it and the sum of the two will be your interest rate for the next year.
Posted on: 08th Jan, 2009 05:28 pm
Can you provide a layperson's explanation about a loan product I cannot find any internet information on: It is a 2/6 LIBOR-indexed arm and the index the margin rate iit s tied to is what cannot be found. My mortgage company refers to it as I11U level or IE. It is suppose to be published in the Wall Street Journal's 6 month LIBOR rates section.

If this is some type of hybrid product, I hope your explanation will help others discern some of the financial engineering strategies firms took that laypeople would not have fully understood. I believed I was signing a contract that would allow my interest rate to fluctuate down or up - tied to the base index of the Wall Street Journal's 6 month LIBOR. That was not the case, however, as my margin is fixed at 5.4, add to that whatever the WSJ 6 month LIBOR rate for this IE or I111U level published rate is, every 6 months, and tack on an additional rounding up rate.

Currently, my 30 year conventional with PMI rate is 10.1% because my mortgage company is stating the I11U index is 4.8% plus the 5.4% fixed and the adjusted up factor.

Refinancing is not an option, because I am, unfortunately, like many upside in my loan. The market value has decreased by $30,000 and I am only 4 years in to paying the tiny amount that goes toward principal. My mortgage provider is stating that this product will find my loan rate always increasing and never go down to the minimum rate which is 8.6 (highest is 14%).

I was told that my loan could adjust downward if that index's rate fell - especially since one part of my rate charged is adjustable. That is not true so I hope you can help remove some of the ambiguities around this type of product.

Thanks for your time!
Posted on: 23rd Jun, 2009 01:20 pm
I currently have a house whose approx value is 490,000. The total loan is 540,000 (first 470,000 and second 70,000). My loan (which was 3/1 ARM initially) rate now is adjusting every year. This September the rate went to low 3.75% (good for me). One of the bank agent contacted me and offered me a FHA 5% rate 30 yr fixed loan. If I go for it , my monthly payment will increase by around $500. Part of increase also has the MI (insurance) of around $200. The new loan terms also require me to escrow the property taxes.

Is is worth going for the new loan?
Posted on: 05th Oct, 2009 11:55 am
Hi AK,

I don't think going for the new loan would be a good idea in this situation. A 3.75% interest rate is quite low. You should take advantage of this low rate as long as possible. I think you can wait at least till the time the rates adjust next year. In the meantime, try and save some money for the new loan next year and improve your credit scores. If you have a good amount of down payment and a good credit score, you can expect a lower interest rate on your new loan. Switching from 3.75% to 5% will not be a good option. Besides, there are other obligations like mortgage insurance and escrow payments etc., when you go for the FHA loan.
Posted on: 06th Oct, 2009 02:34 am
ANybody doing these in california that you're aware of Jessica? I want to swith an arm into a 30 year fixed but can't because my DTI is too high and was told by the bank probably my only option was a no doc loan but I can
't find a bank that does them in california. Help!!!!!!!
Posted on: 15th Mar, 2010 03:14 pm
Hi beeelza,

As far as I know, no doc loans are hardly available these days in any state. Lenders have stopped giving such loans as the real estate market has gone through such a crisis. Lenders will want proper documents before issuing a loan. If you do not have the required documents, lenders won't be ready to grant you a loan.

Take care.
Posted on: 16th Mar, 2010 02:10 am
Dear Madam,

I am from Surat - Gujarat - INDIA. I am planning to raise long term loan of about 1.1 million US$. Is it possible to get it through unsecured loan. Please advice.
Posted on: 27th May, 2010 03:29 am
I am in a 7.625% interest only ARM that is tied to the 6 mo LIBOR. It is due to adjust for the first time in Feb 2011. The margin is 2.25% over the current LIBOR. Today's 6 mo LIBOR is .46%. Is it possible that my new rate if it adjusted today would be as low as 2.71% for the next 6 months. The rider states that the rate can never be lower than 2.65% or higher than 12%. Will it really go down this low? I know there are caps which do not allow the rate to increase more than a certain percentage, but do the caps apply to going down also. My morgage servicer cannot or will not answer this question for me
Posted on: 06th Oct, 2010 06:02 am
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