Adjustable Rate Mortgages - LIBOR is on the Way Up!

The LIBOR has been rising in recent weeks begging the question: How does LIBOR affect the American homeowner?

LIBOR stands for the London Interbank Offered Rate and it is the interest rate at which British banks borrower funds from one another in the London wholesale money market. Many adjustable rate mortgages are based on LIBOR. An adjustable rate mortgage (ARM) is a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Probably the most common index is the 6 month or 12 month LIBOR. A popular ARM mortgage product is the 5/1 ARM. What this means is that the loan is fixed for a period of 5 years. After that time, the rate begins to adjust based on the current LIBOR index. When LIBOR is rising and your loan is in the adjustment period, your rate will go up regardless of whether or not mortgage interest rates are down.

So, why is LIBOR rising?

In recent months the Federal Reserve has embarked on an aggressive interest rate cutting campaign. This has caused the gap between LIBOR and the interest rates set by central banks to increase. Many believe this is a sign that banks are in poor financial health and are reluctant to lend money. This seems logical considering much of this mortgage crisis is due to a lack of liquidity in the secondary mortgage market.

What does this mean to homeowners?

If you currently have a fixed rate mortgage, it means nothing. However, if you have an adjustable rate mortgage that is scheduled to begin adjusting in the next 18 months, now may be a great time to take action. This might be an excellent time to consider a refinance. Of course, remember to explore all options before making a decision to refinance. Ask yourself questions like: How long will you be in this home? How long until you plan to retire? Do you have catching up to do on your retirement savings? Are you preparing to send children to college? Do you currently have equity in your home? Is there a pre-payment penalty on your existing mortgage?
With interest rates near historical lows, this could be a great time to refinance. Just make sure to ask questions and determine if it’s right for you.

Also, check out the refinance calculators at http://noblelenders.com/calculators.php for additional guidance.