Definition:
The LIBOR (London Interbank Offered Rate) index was a widely used benchmark interest rate that lenders used to set rates for adjustable-rate mortgages (ARMs) and other loans. It reflected the average rate at which major global banks lent to one another.
Example:
Laura had an adjustable-rate mortgage tied to the LIBOR index. After her fixed period ended, her lender recalculated her interest rate using the current LIBOR rate plus a 2% margin. This determined her new monthly mortgage payment.
Explanation:
For many years, the LIBOR index was one of the most common benchmarks used by lenders to determine interest rate adjustments for ARMs. When a borrower’s mortgage moves into the adjustable phase, the new interest rate is calculated by adding a margin (a fixed number set by the lender) to the current LIBOR rate.
For example, if the LIBOR rate was 1.5% and the mortgage had a 2% margin, the new interest rate would be 3.5%.
However, due to concerns about reliability and transparency, LIBOR began being phased out globally in 2021 and officially retired in 2023. It has since been replaced in most cases by other benchmarks, such as SOFR (Secured Overnight Financing Rate) in the U.S., which is now commonly used for ARMs and other financial products.
Why is LIBOR-Index Important in Real Estate Transactions?
LIBOR is important because many older adjustable-rate mortgages were based on it. Borrowers with loans tied to LIBOR may see changes in how their interest rates are calculated as lenders transition to new indexes like SOFR. Understanding this shift helps buyers and current homeowners stay informed about how their mortgage payments might change. For sellers, knowing if a buyer’s financing includes a rate adjustment tied to LIBOR or another index can affect closing timelines and terms.