What is the difference between LIBOR and the 5 yr treasury rate?

Answer 1

To correct the answers thus far, LIBOR stands for the London Inter-Bank Offer Rate. It is Europe's version of our WSJ Prime Rate. LIBOR indices most commonly used in mortgages are the 6-month and 1-year LIBOR. This means that their respective rates are posted every 6 months or one year. The 5-year treasury is a domestic index that is posted every 5 years. They are both short-term indices, used for mortgages that are typically have fixed periods lower than 7 years, such as a 5 or 7 year A.R.M. (adjustable rate mortgage).

There are two parts that make up an interest rate. The Index and the Margin. The Margin is the profit that the specific lender charges you. On most A.R.M. products, it is 2.25%. The Index makes up the other part of the rate. In this case one of the two LIBOR's, or the 5-yr Treasury. This is the adjustable part of your rate. The company's Margin remains fixed throughout the life of your loan, and when your loan reaches it's adjustable period, the index can adjust upwards or downwards which would in turn raise or lower your rate accordingly.

Answer 2

The difference is the index they are based upon. The 5 year treasury index is based upon just htat, the 5 year treasury rate. The LIBOR is based upon a more international index, the London Interbank Rate.

Answer 3

actually it's more a time issue. LIBOR is the london interbank OVERNIGHT rate. so, you are comparing an overnight rate with a 5 year rate.