What the heck is LIBOR?
June 18, 2008
Definition: It my sound liek the name of Tony Blair’s political party, but it’s shorthand for the Lond interbank offered rate - the average interest rate at which banks in the London market lend money to one another. Libor is often used as a benchmark to set rates for loans worldwide.
The rates of most U.S. home loans are now pegged to Libor rather than to Treasuries; a typical ARM rate might equal the six-month Libor plus three percentage points. If you’re wondering why your ARM hasn’t fallen much lately, that’s why. Yes, the Fed has cut the federal funds rate by 3.25 percentage points in the past 10 months, causing the six-month Treasury rate to fall from 4.55% to 1.9%. But the six-month Libor has fallen less sharply, from 5.06% to 2.8%. Libor has been acting erratic lately, with some bank sreporting suspiciously low borrowing costs; the association that oversees Libor is discussing how to fix the problem.
But don’t bother shopping around for a Treasury-based ARM, says Keith Gumbinger of HSH Associates, a mortgage information provider. Accurately predicting how much either rate will fall (or rise) is about as tough as, well, becoming Prime Minister of Britain.
(By Joe Light in Money Magazine, July 2008 issues.)
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