Compare Mortgage Quotes

Refinance Rates for Today

Please enable JavaScript for the best experience.

In the mean time, check out our refinance rates!

Company Loan Type APR Est. Pmt.

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.
It will depend upon the market.
Posted on: 12th Jan, 2011 12:51 am
I have a 5/1 Arm loan (30 years) current fixed rate at 7.625 % for the first 5 years. I go adjustable in Oct 2011 and my adjustable laon is based off the libore idex. I owe more on my home than it is worth so i cannot refi or do a loan modification. Based on current market trends and the libor index do you think my loan will increase or decrease when my loan is reset in Oct 2011 ?
Posted on: 22nd Feb, 2011 08:59 am
Hi Guest!

Welcome to forums!

It is quite difficult to say whether your loan will increase or decrease when the loan resets in October, 2011. The rates keep on changing on a daily basis.

Feel free to ask if you've further queries.

Posted on: 22nd Feb, 2011 10:57 pm
Which LIBOR index does the lender use 1, 3, 6 month or 1 year? Also need to know what the lender's margin is ie 2.25%, 2.75% or higher?

All LIBOR rates are considerably lower right now than they were when you first got the loan. If you were to reset the rate today it would likely be below 4% but of course it is impossible to say what rates will do in the future.
Posted on: 23rd Feb, 2011 03:03 am
Hi Jessica, I have a buy to let mortgage with Mortgage Trust and its based on a 3 month LIBOR rate,currently .802 %. Do these domestic mortgage lenders have the Index ARM products or are they for huge commercial mortgages? ( if they do should I change to an ARM? ) Regards. Dave

[Email address deleted as per forum rules. Thanks.]
Posted on: 07th Apr, 2011 09:43 am
Hi DaveD!

Welcome to forums!

Lenders may offer you the Index ARM products. You should speak to the local lenders and check out if they can help you with Index ARM products. However, you should note that getting a mortgage will depend upon your income and your credit situation.

Feel free to ask if you've further queries.

Posted on: 07th Apr, 2011 11:14 pm
Hello, I have a mortgage that (auto company name) purchased from another lender. It is an Interest Only loan that resets after five years (June 2011) to the 6-month LIBOR and adjusts every six months. My original paperwork states the reset with include P&I, but I spoke with the lender and the new payment amounts to continued IO. Have no idea why, but a loan modification company informed me and other online research shows that the lender is leaving the loan at IO for 10 years. It's more that $450K. Not complaining, just trying to figure out how this happened?
Posted on: 08th Apr, 2011 04:01 pm
Welcome Justin,

Your query has been replied to in the given page:

Please take a look at it. I hope it will help you.
Posted on: 08th Apr, 2011 11:21 pm
i have a 6.25% interest only 5-year arm loan. the loan will divert into a 6-months libor loan in feb. 2012. the loan document specifies that on 2/2012 my interest rate will change to 2.25% plus the libor is on that date. my property value is upside down. i am unable to refinance although my credit score is 793. what should i do? should i wait and may be the libor + 2.25% on 2/12 be less than what i am paying now. please advise.
Posted on: 13th May, 2011 11:12 am
Hi S.H,

As you don't have equity in the property, you won't be able to refinance the mortgage. You can sell off the property in order to get rid of the mortgage. After you sell off the property, you can use the sale proceeds to pay off the existing mortgage.

Posted on: 16th May, 2011 12:34 am
Contact your mortgage servicer and see if your loan is with either Fannie Mae or Freddie Mac. If so, you might qualify for the Home Affordable Refinance Program. You will need to hurry as I believe the program is about to end 30 June 2011.

Right now the 6 month LIBOR is at .425 so if your loan was reset today your rate would be 2.675%. Hard to predict, however, what the index will be next year or where house prices will be. At present, the housing market is still very unsettled and further price declines are likely to occur in many areas of the country.
Posted on: 16th May, 2011 02:45 am
Will the libor rate be effected by the US Debt problem? will it negatively impact it?
Posted on: 16th Jul, 2011 03:24 am
Libor rates can be affected due to the US debt problems. Whether or not it will negatively affect libor rates is something which we need to watch out for!
Posted on: 17th Jul, 2011 11:00 pm
We are 7 years into a 10 / 30 libor arm, no balloon.
BoA services our loan originally from LaSalle.
Is it possible to buy down and or, fix an existing mortgage on an apartment building?
Our equity may be gone, with the recent drop in values.
Posted on: 20th Jul, 2011 07:31 am
It will be the lender's discretion. You need to contact your lender and check out if he will allow you to buy down the existing one.
Posted on: 20th Jul, 2011 11:13 pm
Page loaded in 0.057 seconds.