What is a LIBOR ARM?
A LIBOR ARM mortgage is an Adjustable Rate Mortgage (ARM) that adjusts based on a specified LIBOR index. LIBOR stands for "London Interbank Offered Rate", which is the interest rate offered by many London Banks for dollar deposits. These deposits (and thus the indexes) are generally 1, 3, 6 or 12 months.
LIBOR ARMs can have an initial fixed period as short as 1 month to as longs as 10 years. Generally, if the initial rate is fixed for more than 6 months (for example, 3, 5, or 7 years), the rate will then adjust after this period either every subsequent 6 months or 12 months.
Fixed Rate Mortgage vs LIBOR ARM
A fixed rate mortgage has the same payment for the entire term of the loan. An adjustable rate mortgage (ARM) has a rate that can change, causing monthly payments to increase or decrease. LIBOR, which stands for the London InterBank Offered Rate, is an index set by a group of London based banks, and sometimes used as a base for U.S. adjustable rate mortgages.
Standard Variable Rate Loans
Standard Variable Rate loans are the most popular type of loan, are based on the official Reserve Bank rate and, as the name suggests, will vary with time depending on the market. If rates go up so will the repayments and vice versa if they go down. This type of loan is traditionally the most flexible and may include optional features such as the ability to make extra repayments, to redraw funds or to split the loan, just to name a few. It may also be possible to incorporate an introductory discounted rate with this type of loan. Introductory rates are usually effective for the first 12 months of the loan, at which time it then reverts to the standard variable rate for a prescribed period.
Basic Variable Rate Loans
Basic Variable Rate loans are sometimes referred to as 'no frills' loans. They generally offer a lower interest rate but with less features than a standard variable rate loan, and in some cases, more restrictions. If borrower require extra flexibility they may have to pay for it. As with all variable rate loans, the interest may be increased or decreased according to the market.
Fixed Rate Loans
Fixed Rate loans are based on a set term and interest rate, anywhere from 6 months to 10 years. This provides some level of security but does not allow the reduction of repayment amounts should official interest rates fall. Once the fixed rate period is finished the rate will usually revert to a variable rate unless borrower/s decide to rollover for another fixed term. These loans can be combined with variable rate products to provide a mix of security and flexibility. For example 60% of the loan could be a standard variable loan while the remaining 40% could be fixed.
Line of Credit/Home Equity Loans
Line of Credit, also known as Equity Lines or Revolving Credit, works more like a credit card and provides increased flexibility. The lender assigns a credit limit secured against the property, and when you need cash you draw against that limit, usually by writing a check or using a special debit card. As the loan is paid back (the terms of repayment vary), the money becomes available to borrower again. Line of Credit loans usually attract a slightly higher rate of interest than a loan where the balance is continuously reducing. One of the biggest advantages of a Line of Credit is that borrower always has ready access to money.
If borrower is concerned about interest rates rising, but dislikes the inflexibility of a fixed rate loan, they can get the best of both worlds with a Split Variable/Fixed Loan. They get the advantage of features like accelerated repayments, redraw and mortgage offset, without exposing their entire loan to fluctuations in interest rates. How to split the loan is normally up to the borrower but 50/50 or 60/40 splits are the most common. Penalties apply if borrowers break the fixed portion of the loan early.
Keep in mind, these are not items a Notary Signing Agent can explain to a borrower. These are simply supplied to give the Signing Agent a better understanding of the types of loans they may run into.
In addition, there is another entire type of loan that has not been discussed here. That is a reverse mortgage. There is a specific section dedicated to the explanation of a reverse mortgage.