Definition of Libor

The Definition of LIBOR

LIBOR is an acronym for London Interbank Offered Rate. LIBOR is an adjustable rate and is commonly associated with mortgage loans within the United States. If your bank offers an adjustable rate mortgage (ARM) based on the LIBOR then this means the interest rate of your loan will fluctuate according to the fluctuations of the LIBOR index. This rate increases or decreases based on the interbank market of London.

How often your interest rate fluctuates, and any maximum caps are decided on by the lender offering the mortgage loan.

LIBOR versus Prime Rate

Adjustable rate mortgages adjust according to the index to which they are attached plus whatever percentage points are added by the lender. Lenders commonly offer ARMs that are either attached to the Prime Rate or the LIBOR. Which rate a lender offers can have a tremendous impact on the amount of money in interest charges you pay over the life of your loan. The LIBOR and the Prime Rate are often similar, but there is usually a difference between the two. You can save substantial money by choosing the index which is lowest at the time you initially set your rate.

Lender Explanation

Your lender may attempt to explain the definition of LIBOR and how it will affect the status of your loan, but do not get swept away by flowery promises of a miraculously low interest rate. The LIBOR is simply another index by which some adjustable rate mortgages are set. It is not a sure-fire way to the lowest interest rate possible.

When it comes to adjustable rate mortgages – whether the index is the LIBOR, the Prime Rate, or some other method – there is no concrete way to ensure the lowest interest rate for the life of the loan.