The London Interbank Offered Rate (LIBOR) is the primary index used on adjustable rate mortgages in the United States. It’s the interest rate that banks pay to borrow money in the London money markets. LIBOR is published by the International Continental Exchange (ICE). It’s calculated through a survey that the ICE Benchmark Association (IBA) sends to banks who trade and do business in the London money markets. The US Dollar 1-month LIBOR is what a bank would pay to borrow US dollars for 1 month. The 6-month LIBOR is what a bank would pay to borrow money for 6 months. The 1-Year LIBOR is what a bank would pay to borrow money for 1 year.
Even as New York city is home to the largest stock market in the world, London is home to the largest money market in the world. Banks who do business internationally tend to trade and borrow money from one another in the London money markets. That’s why LIBOR is the most widely used index in the world, and that’s why the US Dollar LIBOR is used as the primary index on adjustable rate mortgages in the United States… it is the most accurate measurement of a bank’s cost of money.
As you can see from the chart, the US Dollar 1-Year LIBOR closely tracks the Fed Funds Rate, which is the interest rate that banks pay to borrow overnight funds from other banks in the US. The Fed Funds rate is controlled by the Federal Reserve. Therefore, LIBOR is likely to change whenever the Fed changes or is getting ready to change the Fed Funds rate. Please contact me for further details or to evaluate your mortgage options!