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What is a Libor Loan?

Libor, which stands for �London InterBank Offered Rate,� is ultimately an adjustable mortgage rate. Libor Loan interest rates are calculated by using the current interest rate in the country. Libor Loans are often compared to the United States� 1-Year Treasury Security Index. What differs, however, is Libor offers different term periods. You can choose from a 10 year loan that is quoted for 1, 3, 6 and 12 month periods.

Why is a Libor Loan beneficial?

Libor loans let you take advantage of just paying interest on your loan until the term is through. Meaning, you don�t have to pay the principal portion of your loan for up to 10 (or more) years. This saves money and lets you have more spending money during the term of your loan. Since the monthly payment is so low, it allows more flexibility with your finances. In some cases it may also be more beneficial because you can get tax benefits. The Libor loan also contains some unique features:

  • Initial Interest Rate- The initial interest rate will stay constant for six to ten months, kind of like how an ARM would work.
  • Adjustment Period- After the initial months of the constant interest rate, the interest rate will change depending on the market.
  • Rate Caps- A rate cap will limit how much an interest rate can change. They usually consist of: 1% for 6 months, 2% on 1-2 years, and over 5% if longer then 7 years.
  • Maximum Rate- The absolutely highest the interest rate is allowed to get.
  • Attractive Buydowns- If you take out a long Libor you can usually buy down the interest rate, kind of like buying discount points.
  • Negative Amortization does not exist on a Libor.
  • High Index Volatility- The interest rate is more volatile then US Government issued securities.

If all these seem like a good option to you then you should consider taking out a Libor loan.

National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 7, 2012