Written By: Glenn Michaels, Op-Ed Writer
Many super jumbo loans, more than half took Libor (London Inter-Bank Rate) Arm and those that did are saving money as we read this.
The borrower who took the Libor Arm normally starts out with a low initial rate often known as a “teaser rate”.
Most Libor Arm loans have a margin of 2.25% which at adjustment is added to the index value to determine the new rate subject to adjustment caps.
The most common Libor Arm is the 6 month Libor Arm but there are other periods such as the one year, three year and five year. The three and five year Arm has a fixed rate for the initial three or five term and then the loan will adjust either every year or every six months.
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Why would anyone take an adjustable rate mortgage in a low fix rate market? The answer in this case is to save money. A lot of money.
Upon researching the average rates for the week of October 28, 2013 the rates are lower than the 30 year FNMA 60 day rate so the Libor Arm borrower has saved a considerable amount of money by taking the Libor Arm.
Below is the history of the Libor Index and the 30 year FNMA 60 day rates for this week, last month and for a year ago. You be the judge and you will see right away of the savings for taking out the Libor Arm. Take a look at the index values below:
This Week Last Month 1 Year Ago
1 month Libor index value 0.17 0.18 0.21
Margin (Fully Indexed Rate) 2.42 2.43 2.46
3 month Libor Index value 0.24 0.25 0.31
Margin (Fully Indexed Rate) 2.49 2.50 2.56
6 month Libor index value 0.36 0.37 0.54
Margin (Fully Index Rate) 2.61 2.62 2.79
1 Year Libor Index Value 0.61 0.63 0.88
Margin (Fully Index Value) 2.86 2.87 3.13
30 Year Fixed Rate 60 Day 3.77 3.89 2.86
The Libor Arms generally stated around one to one and a half percent with a margin of 2.25%.
Therefore the initial period was significantly lower than the fixed rate. When you add the margin of 2.25% the adjusted rate is still less than the fixed rate in most cases.
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If you had a 1 Year Libor Arm the adjusted rate after one year would be 3.13% before rounding to the nearest .125%. However, the adjustment cap may prevent the borrower going that high at adjustment. Most six month Libor Arms had a 1% adjustment cap and 6% over the life of the loan.
Looking at the fixed rates and looking at the index values plus the margin the Libor Arm borrower has managed to save thousands of dollars over the last couple of years.
Borrowers who took the Libor Arm have really saved thousands. Usually due to adjustment caps the borrower will never be at the fully indexed rate. If you do a comparison of the rates you can see that the Libor Arm has been a winner for the most recent years.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
