Interest Only Mortgages And The LIBOR, What Is It

Interest Only Mortgages and the LIBOR, What is it?

What is LIBOR and why would we want to use a LIBOR? How does LIBOR tie into interest only mortgages? These are really good questions. I myself until recently had no idea what a LIBOR was or is, or if I wanted to use one. I am a little more educated now, and still don't know if I want to use LIBOR.
LIBOR is the London Inter Bank Offered Rate. In a more useful definition, it is the interest rate offered by a specific group of London Banks for U.S. deposits with a stated maturity date. It compares to the CD rate that your local bank would offer to you.
The important connection to make here is the role the LIBOR plays in interest only mortgages. As more and more of our mortgage loan market turns to this type of loan product, we will begin to hear more about LIBOR and the many uses and influences in our day to day life.
The LIBOR has traditionally been a tool for the commercial lender and affected more of the commercial market than the private sector. As the private market moves into a bigger risk sector than ever before, the LIBOR will loom as a larger figure in the ratio used to determine the interest to risk factor that your local banker, mortgage company, or finance company will assume. The interest only mortgage option is a bit riskier than the traditional mortgage products, in that it requires little or no down payment, and over the course of the mortgage, the interest is the only initial monies collected. That means at the end of the term, say 5 years for most, the buyer still owes the same amount of principal. Risky business, this interest only loan. This is where LIBOR begins to play a bigger picture. Commercial loans, primarily an investment tool, have traditionally been considered the bigger risk, since these loans weren't providing housing for the borrower. But today, the private borrower is investing no more than a commercial borrower; in fact many times, even less. These new age borrowers aren't really that committed to these homes, either. Most are using the interest only option as an investment tool, or a way to buy bigger than traditionally possible, or as a way to fund a professional lifestyle with a starting salary and an expected temporary stay. Either option means a bigger risk for the lender; LIBOR helps to set risk percentages and provide stable financing options for the lender.
The commercial interest only LIBOR mortgages are for commercial borrowers. These borrowers are investing in residential unit complexes. In other words, they're borrowing to buy apartment complexes, not individual homes; nonetheless, they too are being offered the interest only options and the interest rate for these commercial interest mortgages is set by the LIBOR rate plus a certain percentage above.
It is for these commercial investors that the interest only loan options should be used. The borrowers are business people, with business plans, and enough knowledge about the workings of commercial and mortgage loans, to understand a good investment versus an impossible dream. The commercial mortgage industry is a huge market, and since most of the monies borrowed exceed the $100,000.00 limit, LIBOR rates are used for determining the commercial loan rates.
I still am not an advocate of the interest only mortgages; but for some situations they are the best option. In a business setting, when many factors have been thoroughly discussed and the interest only option has proven itself to be the best choice, I think it should be used. This option, however, should remain as the knowledge of LIBOR is among the masses, virtually unknown.
So, as you begin your trek into the mortgage market, be prepared to hear more and more about the interest only loan options, and more and more about the role LIBOR plays in this expanding market.