For many homeowners with adjustable-rate mortgages (ARMs), the fluctuating interest rate will be based on the LIBOR rate. This stands for “London Inter-Bank Offered Rate” and it represents the interest rate at which London banks can borrow money from other banks in a particular currency.
LIBOR Effect on Adjustable-Rate Mortgage Loans
After the first of each month, a 12-month LIBOR rate is reported to track a year’s worth of deposits in U.S. Dollars. I always pay special attention to the ups and downs of LIBOR rate because it directly affects the mortgage industry and the homeowners who opted for adjustable-rate mortgage loans. A long-term ARM is always somewhat of a gamble because you never knew exactly what the rates will be over the term of the loan. They could go way down and save you money on monthly interest payments or they could go way up and ending up costing you more than a 30-year fixed loan might.
Current LIBOR Trends
As the LIBOR rate report came in for February 2018, it definitely drew a lot of attention from lenders with ARM clients. The 12-month LIBOR rate has reached a level that has not been seen since 2008, which we all know is the year the last major mortgage crisis hit. The chart below demonstrates the significant dip made by the LIBOR rate from 2010 through 2015. It has steadily been going up since 2016 and now again has reached a 10-year high while continuing its trend upward.
The February 2018 LIBOR index is 2.26671%, which is the highest it has been since December of 2008. For most of the past 10 years, it has been under 2 percent (and often under 1 percent), which was good news for ARM borrowers. Now, people with an existing adjustable-rate loan can expect to pay more and it will likely continue to go up in the coming months.
Of course, there is a new factor in play in 2018 that every borrower needs to be aware of…
LIBOR on the Way Out?
It is important to note that the LIBOR rate is actually being phased out this year. The United Kingdom is planning to cease publishing this index as a benchmark, which will affect $300 trillion worth of loans worldwide. To prepare for this, the U.S. Federal Reserve set up the Alternative Reference Rates Committee in order to find a replacement rate for LIBOR. Their proposal was to base the index on a broader Treasuries repo financing rate. This rate would actually be based on real transactions, in particular the cost of borrowing cash secured against U.S. government debt.
This new rate measure is expected to be published in the first half of 2018 and lenders are preparing for this major transition away from the LIBOR rate. All existing loans tied to the LIBOR benchmark should be reviewed. Loan documents need to include sufficient language to choose a replacement rate in the case the LIBOR is no longer published. New loan documents may need to be written as precaution so that the new rate benchmark is clear and that the interest rate calculation is fair and accurate.
Making the Transition
It will be a major transition for the entire lending industry and it remains to be seen how interest rates may be affected as the year goes on. Based on the LIBOR, they will continue to go up and that will likely be true no matter what new benchmark system is used. It is the cyclical nature of the mortgage industry self-correcting after many years of record low rates.
If you have an adjustable-rate mortgage loan, now is the time to review it and make sure the documentation is clear regarding any references to LIBOR. If you have an ARM and have been on the fence about refinancing to a fixed-rate loan, it is an ideal time to get off the fence and take advantage of fixed interest rates that are still quite low. You could end up saving a lot of money. Either way, it’s worth reviewing with a lender that can help you make the right borrowing decisions.
Your San Diego Mortgage Experts
Contact Transparent Mortgage today at (619) 929-0199 for help with your existing ARM, a new home loan or refinancing an existing loan of any type. LIBOR or not, we’ll get you moving in the right direction.