What is Libor? Libor is short for the London InterBank Offered Rate, the interest rate offered for U.S. dollar deposits by a group of large London banks.

What is Libor Mortgage? A Libor mortgage is an adjustable rate mortgage (ARM) on which the interest rate is tied to a specified Libor. After an initial period during which the rate is fixed, it is adjusted to equal the most recent value of the Libor plus a margin, subject to any adjustment cap. Libor ARMs were developed to meet the needs of foreign investors looking to minimize their interest rate risk on dollar-denominated investments.

How does Libor Mortgage work? For example, on January 1, 2007, one lender was offering a 6-month Libor ARM at 3.5%, zero points, and a margin of 1.625%. The new rate 6 months later, on July 1, 2007 will be 1.625% plus the 6-month Libor at that time. If that is (say) 3.0%, the new rate will be 1.625% + 3.0% = 4.625%.

What are its features?

• Libor is suitable for foreign investors (A-Quality borrowers) looking to minimize their interest rate risk on dollar-denominated investments.
• Buydowns : Libor ARMS allow for huge buydowns and low margin for very low points. Incredible bargains are possible with this option.
• No payment flexibility, No Negative Amortization.
• Very volatile, currency fluctuation affect the rates directly.
• Initial rate period is from 6 months to one year. During this period initial rate holds. Usual ARM is 6 to 12 months.
• After the intial rate period, the variable rates kick in.
• Rate adjustments have CAPS just like ARM mortgages.
• Some loans also have interest CAPS, % beyond which interest cannot increase.