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What is LIBOR?
The London Interbank Offered Rate, or LIBOR, is the most common benchmark interest rate index used to make adjustments to variable-rate loans and credit cards. LIBOR is used by world banks when charging each other for short-term loans.
LIBOR is based on five currencies:
- U.S. dollar (USD)
- Euro (EUR)
- Pound sterling (GBP)
- Japanese yen (JPY)
- Swiss franc (CHF)
LIBOR serves maturities that range from overnight to one year. Each business day, banks work with 35 different LIBOR rates, but the most commonly quoted rate is the three-month U.S. dollar rate. The Wall Street Journal publishes LIBOR rates daily.
To calculate LIBOR rates, the British Bankers’ Association surveys a panel of banks on the rates at which they could borrow money under certain conditions. The numbers are averaged and reported.
LIBOR serves as the benchmark reference rate for government and corporate bonds, mortgages, student loans and credit cards, as well as derivatives and other financial products. When a loan rate moves up or down, a changing LIBOR rate is partially responsible.
Considering an adjustable-rate mortgage? Learn how an index such as LIBOR affects your rate and payment.
A bank may price a five-year loan with a floating rate at the six-month LIBOR, plus 2.5 percent. At the end of each six-month period, the bank would then adjust the interest rate based on the current six-month LIBOR, plus the same 2.5 percent spread. This could translate to either a decrease or an increase in the rate.
For example, if the terms on a $25,000 personal loan are based on a six-month LIBOR of 2.5 percent, plus a spread of 2.5 percent, the interest rate on the loan would be 5 percent for the first six months. If the LIBOR rate increases to 4 percent after six months, the interest rate would adjust to 6.5 percent.
Does LIBOR factor into your mortgage planning? Compare lenders and loan rates to see which type of mortgage is right for you.