Libor is a type of adjustable rate mortgage loan. “Libor” is an acronym that stands for the London Interbank Offered Rate. In essence, it is a means for investors, including small private investors, to reduce risks by investing in the “euro-dollar” market, rather than restricting themselves to the American dollar market. The Mortgage Resource Center explains that, while everything is denominated in dollars, it is a global dollar market based in Europe that is tied to the London currency market.
The main advantage of Libor is that your mortgage money is pooled with other investors in the global Eurodollar market. Therefore, the interest rate fluctuates for this group of investments and is not necessarily tied to the American market and its fortunes. Because it is global, there is a greater chance for stability than if tied to a specific place. The basic theory is that, even if American interest rates go up, there is still a chance for other responsible investors worldwide, using dollars and seeking a safe home for their money, to invest in Libor and control the rise of these rates. In other words, this is a dollar investment that is not necessarily tied to the decisions of the Federal Reserve in Washington, because it can also take advantage of dollar investments from all over the world. This form of investing in global dollar markets is meant to lower risk. It is a very conservative investment, but it remains controversial.
Libor is popular in times of economic uncertainty. Libor is based on the idea that, in difficult economic times, a larger pool of savvy investors is safe, therefore, rates tend to trend lower in general. Since the 2008/2009 housing bust in the American market, Libor is no longer competing with many sub-prime lenders. Therefore, it has some of the lowest rates in the entire dollar market. Even more, because investors are investing mutually in a single Libor fund, the more one pays, the lower the rate. The more this group of investors stays healthy and conservative in their outlook, the better the rates. Because Libor is for conservative investors looking for a low-risk investment, it seems a good bet.
This Eurodollar market is as large or larger than the American treasury market, and it trades around-the-clock. It is not geographically located and is, therefore, under no specific government regulation. It is a purely market-driven set of investments and is dependent mostly on the decisions of the investors themselves.