How to Understand The LIBOR Rate Index

When you get an adjustable rate mortgage (ARM), two main factors determine the rate you will pay:

1. Margin- This is the agreed upon percentage (Points), that is added to the index.

2. Index- This is the basis to compute your loan rate.

Before you commit to a loan you should determine the type of loan and index that will work best for your situation.

Difficulty: Easy

Instructions

1. London Inter Bank Offered Rate- (LIBOR) Is the rate the London banks pay to borrow from reserves of other banks. The rate is published daily after 11:00AM, London time or Greenwich Mean Time (GMT).
   
   The rate is reported by Reuters in the U.S.

2. Pro- The LIBOR adjust with market trends, but you can select the adjustment term that works best for you. The typical adjustment terms are one, six, and twelve month terms. The term you select is when your rate will be adjusted up or down.

3. Con- The LIBOR is subject to international economics. Even if the U.S. economy is doing good, the LIBOR would rise or fall based on banks in foreign countries, namely: England, Canada, Japan, Switzerland, and Germany.

Tips & Warnings

• Always know the interest cap of your loan and make sure you can afford to make the payment if worst case scenario, the loan hit the max rate.