LIBOR

The LIBOR, or London Inter Bank Offer Rate is an average of the interest rate paid on deposits between banks in the Eurodollar market. It is an international index which follows the world economic condition. The LIBOR averages rate quotes from five major banks: Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.

LIBOR rates are often tied to adjustable rate mortgages (ARMs). The LIBOR rates widely used as ARM indexes are the: 1 month, 3 month, 6 month, and 1 year LIBOR. Mortgage products associated with the LIBOR typically offer borrowers lower initial interest rates than do other indexed rates, and thus are competitive with mortgage products linked to the COFI or 6 month T-Bill. An advantage of LIBOR adjustable rate mortgages is they usually do not allow the borrower to accrue deferred interest, or negatively amortize. In addition, borrowers who opt for LIBOR based products are generally protected from wide fluctuations in interest rates due to lifetime interest rate caps.

The LIBOR index compares most closely to the 1 Year CMT index in terms of volatility and reaction to market changes. It tends to move more quickly and with greater fluctuation than the 11th District COFI, as indicated by the graph.