Delaware Mortgage Loans

LIBOR is the rate of interest that member banks of the British Bankers’ Association charge when they lend money to one another in the wholesale money markets in London, somewhat similar to our Fed Funds Rate. In fact, the LIBOR tends to closely track the US Fed Funds Rate. LIBOR is a standard financial index that is used globally and in US capital markets, and the Wall Street Journal publishes the index on a daily basis. In general, changes in the LIBOR have tended to be smaller than changes in the Prime Rate. There are several LIBOR maturities much like U.S. Treasuries, but the 1-month and 6 month are the most readily used and available LIBOR indexes for mortgage loans. Although they are becoming increasingly more common in use for consumer loans and ARM¹s, LIBOR Indices have traditionally been a reference figure for corporate and commercial financial transactions.

Summary:
Over the past several years, the LIBOR has slowly begun to replace the more commonly used 1-year T-bill index as the index of choice for hybrid ARMs such as 3-, 5-, 7-, and 10 yr products to determine rate at their adjustment periods. It is very established and dependable, yet it does carry a risk of slightly larger volatility when the US Dollar fluctuates. This is due to the fact that LIBOR is a European based index and reacts to the dollar strengthening or weakening much like the Euro becoming more valuable or less valuable to the dollar in slowing and expanding economic situations. The shorter term LIBOR products are great in a Fed easing cycle, but should be used cautiously and possibly avoided when the Fed is hiking short-term rates, as the index could rise very quickly. In these situations, a better option may be the 3 or 5 year Hybrid LIBOR ARMs.

Ideally Suited for:
This index is ideally suited for the more aggressive borrower on the 1 month and 6 month products as it will tend to fall faster than any other index and yet also rise as fast as the Fed hikes in rising markets and sometimes even faster depending on currency conditions. The key here is the margin. Some investors offer buy downs into the low 1% range for this product and can make it a very attractive choice when looking at a ten year chart with your customer. Hybrid ARMs such as the 3-, 5-, 7-, and 10-year products that use the LIBOR for the change rate at adjustment time can have a wide variety of use depending on your clients’ desired length of time in their home and other specific needs and goals.