What is LIBOR

What is LIBOR? The London Inter-Bank Offered Rate is an interest rate index that is used by some lenders to set the range of interest rates offered for adjustable rate mortgages.

Consider interest rates when looking at amortization.

If you are wondering why you, as a borrower, should bother to learn about LIBOR at all, be aware that the more knowledge you have about the various mortgage loan options the better equipped you will be to make the right decision when the time comes to decide on which loan you want to apply for. Whether your mortgage loan is to purchase a home or refinance a home that you already have, getting the best interest rate is vital to ensure you don't pay too much money in interest charges over the life of the loan.

Obtaining a mortgage loan based on the LIBOR does not guarantee you the best interest rate, nor does it indicate that you will have a high interest rate. LIBOR rates are just like any other interest rate index in the sense that it is always subject to go up or down at any time.

Who decides what is LIBOR rates on a day to day basis? This rate is set by averaging the interest rates specific London-based banks charge for loans to each other. These banks are highly rated and therefore are in positions to offer favorable interest rates.

It is the British Bankers Association that compiles and releases the interest rate every business day. The rate is subject to change daily, but this does not mean that it will indeed change every single day. When you obtain a LIBOR-based mortgage loan, your interest rates will not fluctuate every time the LIBOR fluctuates; instead, your interest rate will fluctuate at predetermined intervals as set by the terms of your loan.

The LIBOR is not just used in London. Although this rate originates from London banks, it is an index that is used on a global scale. The United States in particular uses the LIBOR as a common interest rate index offered to borrowers applying for adjustable rate mortgages.

This does not mean that all mortgage lenders offer mortgages based on the LIBOR. Some lenders offer mortgages based on a different rate index, such as the U.S. Prime Rate or some other index. If you are interested in obtaining a mortgage loan based on the LIBOR, ask your preferred lender if they offer LIBOR based mortgage loans.

It is important to understand that while mortgage lenders base adjustable rate mortgages on an index, this does not mean that the interest rate you receive for your mortgage loan will be the same as the index.

For example, if you receive a mortgage loan based on the LIBOR, you will not receive the actual LIBOR interest rate for the day you lock the interest rate in. Instead, you will receive that rate plus a margin. The margin is the additional amount added by the lender to an interest rate. This is common practice for LIBOR loans as well as for loans based on other indexes.

For this reason, do not expect that just because the LIBOR interest rate is listed as one particular number that you will receive this exact interest rate even with an excellent credit rating.

There are many reliable resources to find out what the current LIBOR interest rate is. Reuters publishes the rate daily, but this information is also disseminated into other sources like The Wall Street Journal and Bankrate.com.

To find out what your lender is offering for a LIBOR based mortgage, contact the lender directly and speak to a mortgage loan representative regarding what is LIBOR rate offered.

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