What Is the Risk of a LIBOR Loan?

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LIBOR stands for London Interbank Offered Rate. This is an index that, when combined with a certain margin, is used to set the rate for certain adjustable-rate mortgages. The LIBOR can fluctuate up or down.

Effects

When the economy is in a downturn, the LIBOR is lowered, which makes the interest rates for variable rate loans decrease. This makes borrowing money cheaper. More lending takes place, which gives a boost to the economy.

Significance

The LIBOR can also be increased in response to certain market conditions. When this happens, anyone with an adjustable rate mortgage loan tied to the LIBOR is at risk. The payment could increase. When someone’s payment increases, his budget is affected. He may not be able to pay a larger payment.

Warning

If your mortgage is past due, the lender will foreclose on your property if you don’t bring it up to date. This can have a damaging effect on your credit file.

Considerations

The LIBOR is the rate that banks use when they loan money to other banks throughout the world. When the LIBOR increases, banks will stop borrowing funds from each other. This creates a shortage of funds and could slow down economic activity.

Potential

When you have an adjustable rate mortgage tied to the LIBOR, it can become very difficult to budget and plan for the future knowing that your payment can go up.

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