What is the LIBOR Interest Rate

What is the LIBOR interest rate? The term LIBOR is an acronym for the London Interbank Offered Rates. Specifically, it is the average interest rate that is charged when banks within the London interbank market borrow money from each other. There are literally hundreds of LIBOR rates available, in many international currencies. The British Bankers’ Association establishes what is the LIBOR rate every U.K. business day. The BBA surveys its group of banks on the costs they charge to borrow funds. Maturities of this rate span from overnight to twelve months. In the U.S., several LIBOR rate maturities are often used in the process of pricing loans. These consists of one, three, six and twelve-month maturities.

LIBOR rates were initiated during the 1980s as a worldwide standard in the banking system for short-term loans among banks. Countless business and consumer loans, instruments of debt and other debt-related securities are priced with LIBOR rate indexes.

LIBOR-indexed adjustable rate mortgages (ARM) are a viable option for many homeowners. Initial rates are often lower than those offered by other ARMs. The preliminary fixed-rate period of a LIBOR mortgage can vary from one month to as many as ten years. However, because the rates are tied to LIBOR rates instead of U.S. Treasury rates, there is greater variability with LIBOR ARMs and a higher risk of divergence from the original low rate offered for the first defined period of the loan. Interest-only loans are also often tied to LIBOR rates.

During the current recession, banks are not as willing to lend each other money as they were in better times. With an increasing number of bank failures, these institutions are much more wary of granting loans, either to each other, or to consumers. As a result, LIBOR rates have been affected during 2009. People investigating mortgage options should consider whether LIBOR-tied rates or rates tied to other indexes make the most financial sense in the long term.