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Libor Tutorial

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. There are actually several Libors corresponding to different deposit maturities. Rates are quoted for 1-month, 3-month, 6-month and 12-month deposits.

What Is a Libor adjustable rate mortgage (ARM)?

A Libor ARM is an adjustable rate mortgage 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.

For example: if one lender is offering a 6-month Libor ARM at 2%, and a margin of 1.6%, the effective interest rate for that period will be 3.6% (i.e. LIBOR plus the margin) The new rate 6 months later will be 1.6% plus the 6-month Libor at that time. If that is (say) 2.2%, the new rate will be 1.6% + 2.2% = 3.8%.

To view the current LIBOR rates click here.


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