Understanding Realty
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.
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