Q: We’ve been in an interest-only LIBOR mortgage for just over a year. The interest rate has done nothing but increase every six months.
What do you think of these LIBORs?
A: LIBOR stands for the London Inter-Bank Offered Rate, and it is the rate that contributor banks in London offer each other.
Overall, there’s nothing wrong with having a loan tied to the LIBOR. LIBOR tends to be a slow-moving index for short-term loans that trails the rest of the market. Your loan has gone up over the past year and a half because short-term interest rates around the world, including the Federal Reserve Bank’s Federal Funds rate, have gone up.
MoneyCafe.com offers a look at the LIBOR rate for 1-year adjustable rate mortgages, as reported by Fannie Mae. On one of their charts, LIBOR rates hit a high of nearly 8 percent midway through 2000, then fell to a low of 1.75 percent for much of 2003 and into 2004, and have now risen back to 4 percent.
It’s no wonder your interest rate, and corresponding monthly mortgage payment, has risen.
What you have to do is think about how much more risk you’re willing to take with these loans, or if you want to refinance now into a 30-year loan (if you’re planning to be in your home long-term) or even a 5/1 or 7/1 adjustable rate mortgage.