LIBOR stands for London Interbank Offered Rate. It is a rate that is calculated based on the interest rates at which banks borrow funds from other banks in the London interbank market. LIBOR is calculated and published by the British Bankers’ Association on a daily basis. This value is considered an average and the prices of lending will fluctuate throughout the normal course of the business day. LIBOR is also attached to ten currencies including the US Dollar. This is where it begins to have an affect on Reverse Mortgages and traditional mortgages.
How Does It Affect Borrowing?
Some banks opt to use the six-month USD LIBOR benchmark as the basis of setting their rates as opposed to American indexes. LIBOR is typically used overseas and in Europe. The rates can be higher or lower than American markets thus causing a difference in lending practices based off of it. Not all financial institutions use LIBOR as their benchmark.
Treasury Security Index and LIBOR
The Treasury securities index and LIBOR typically track near each other. One sometimes offers a better rate than the other thus making it more attractive to borrow from. This means that it gives the borrower a bit more freedom in their choice while shopping for a Reverse Mortgage. Some banks may offer mortgages based from the LIBOR index or the Treasury securities index.
LIBOR tends to have more reflection on economic standards in Europe and various places overseas than it does America. The rate may or may not be suitable to the American economic climate whereas the Treasury securities index may reflect poorly elsewhere.
What does this mean?
Not much really. A LIBOR index backed loan could offer a better rate than a Treasury Securities index backed loan. It depends much on the financial institution one is borrowing from and the current daily rates.
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