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need help with interpreting LIBOR

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Anonymous
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need help with interpreting LIBOR

Hi,

I have an ARM that will mature by the end of this year.  The loan amount is $440,000 and, interest rate is 5.125%. My house worth $465000 or little bit more.   I live in Norther Virginia, the index is based on LIBOR and, the margin is 2.125.  I have an excellent credit score above 760 but, do not have any cash.  Should I re-finance or sell the house?  Someone told me to keep the loan since, LIBOR rate is low.  I need to know how to interpret LIBOR so, I can figure out my future rate. 

Thanks for your comments 

 

 

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4 REPLIES 4
DallasLoanGuy
Super Contributor

Re: need help with interpreting LIBOR

Message 2 of 5
Lel
Moderator Emeritus

Re: need help with interpreting LIBOR

Assuming that the your index is the Wall Street Journal LIBOR (there's other published versions out there, but all basically the same), then you can see the daily trend through the link below.  Most ARMs, I believe, are pegged to the 1-year LIBOR, as opposed to the shorter-term rates.

 

Daily WSJ LIBOR history

 

If your loan were to reset right now, your interest rate would drop to about 4%.  That would be good.

 

If the world starts coming out of the recession, as some people are optimistically predicting, and if inflationary pressures start creeping up again, then the central banks of the world will start raising their rates.  This will cause upwards pressure on the LIBOR, and upwards pressure on long-term (read: mortgage) interest rates.  If the LIBOR returns to the same level that it was exactly 2 years ago, then your interest rate would be around 7.5%.

 

Refinancing to a long-term fixed rate, which can be in the upper 4% range, wouldn't be a bad move if you're planning on staying in your home for a while.  These are the best interest rates that anyone has seen in a very long time, and they'll definitely rise again some day.  However, it doesn't look like that you have the equity to take advantage of these low rates through conventional channels.  You might qualify for a Home Affordable Refinance, though.

 

Making Home Affordable

Message 3 of 5
Anonymous
Not applicable

Re: need help with interpreting LIBOR

Thanks for your replies.  Since, I am not planning on staying in this house for a long time I, am considering 5/1 ARM.  With my current situation (been paid my mortgage, my income and, no defaults ...) does not qualify me for home affordable programs.  What do you think, is ARM a good option to go with?

 

 

Message 4 of 5
Lel
Moderator Emeritus

Re: need help with interpreting LIBOR


@Anonymous wrote:

Thanks for your replies.  Since, I am not planning on staying in this house for a long time I, am considering 5/1 ARM.  With my current situation (been paid my mortgage, my income and, no defaults ...) does not qualify me for home affordable programs.  What do you think, is ARM a good option to go with?

 

 


This would be a good time for DallasLoanGuy to post an image of his magic 8-ball.

 

If anyone had the ability to predict the future, they would be picking lottery numbers and not spending time on these boards. Smiley Wink

 

If interest rates stay at this level through the end of the year, then you'd be looking at nice cut in your interest rate.  There's good reason to believe that the LIBOR could stay at this level, because most analysts do not believe that the central banks are going to raise interest rates anytime soon, possibly not until next year at the earliest.  But even though the LIBOR tends to follow the rates set by central banks (by this I mean the Federal Reserve and their equivalents in other countries and the EU), it is a variable rate that changes every day.

 

If the markets get a sense that a recovery is underway and that inflation is starting to be a concern, then the LIBOR will rise in response to those inflationary pressures, even if the central banks leave interest rates unchanged.  If central banks do raise rates, then the LIBOR will almost definitely move up as well.

 

If the LIBOR goes up to the level that it was last fall, you could see a jump in interest rate to over 6%.   If it goes up to 2006 levels, your interest rate could go to 7.5-8%.  Of course, once your interest rate is set for the next year, it will not change, even though the LIBOR will change every day.

 

That's the nature of an ARM.  It's variable and unpredictable.  You'll need to decide how long you really think you're going to be in your home, and whether you are able to tolerate potentially drastic increases in your interest rate.

 

Also, are you currently paying just interest, or interest and principal?  If the first 5 years were interest-only, then remember that you will start paying principal when these first 5 years are over.  The principal will be amortized over 25 years. 

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