What is LIBOR and why would we want to use a LIBOR? How does LIBOR relate to interest only mortgages? These are in fact good questions.
LIBOR is the London Inter Bank Offered Rate. In a more practical definition, it is the interest rate presented by a specific group of London Banks for U.S. deposits with a stated maturity date. The CD rate that is provided by your local bank will be compared to it.
The role the LIBOR plays in interest only mortgages is the important connection to make here. As our mortgage loan market turns to this type of loan product increasingly, in our day to day life, we will begin to hear more about LIBOR and the many uses and influences.
For the commercial lender, the LIBOR has usually been a tool and affected more of the commercial market than the private sector. The LIBOR will loom as a larger figure in the ratio used to determine the interest to risk factor that your local banker, mortgage company, or finance company will assume, as the private market moves into a bigger risk sector than ever before.
When compared with the traditional mortgage products, the interest only mortgage option is a bit riskier in that it requires little or no down payment, and over the course of the mortgage, the interest is the only initial monies collected.
That means towards the end of the term, say 5 years for most, the buyer still be indebted to the same amount of principal. This interest only loan is a risky business. This is where LIBOR begins to play a bigger picture.
Since the commercial loans weren't providing housing for the borrower, these are traditionally been considered the bigger risk. But today, the private borrower is investing no more than a commercial borrower; actually even less many times.
These new age borrowers aren't really that loyal to these homes, either. Interest only option is used by most as an investment tool, or a way to buy bigger than traditionally possible, or as a way to fund a professional lifestyle with a starting salary and an expected temporary stay.
Either option means a bigger risk for the lender; for the lender, LIBOR helps to set risk percentages and provide stable financing options.
The commercial interest only LIBOR mortgages are for commercial borrowers. These borrowers are investing in residential unit complexes.
In other words, they're borrowing to buy apartment complexes, not individual homes; however, they too are being offered the interest only options and the interest rate for these commercial interest mortgages is set by the LIBOR rate in addition to a certain percentage above.
Interest only loan options should be used for these commercial investors. The borrowers are business people, with business plans, and adequate knowledge regarding the workings of commercial and mortgage loans, to recognize a good investment versus over an impossible dream.
The commercial mortgage industry is a huge market, and since most of the monies borrowed go beyond the $100,000.00 limit, LIBOR rates are used for determining the commercial loan rates.
When many factors have been thoroughly discussed in a business setting and the interest only option has proven itself to be the best choice, then it should be used. This option, however, should continue as the knowledge of LIBOR is among the masses, virtually unknown.
So, be prepared to hear more and more about the interest only loan options as you begin your trek into the mortgage market, and in the expanding market, more and more about the role played by LIBOR.
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