What is defintion of terms of 5/6 libor?

Question

WHAT DOES LIBOR MEAN? DOES THIS MEAN THE LOAN IS FIXED FOR 5 YEARS AND THEN WILL BE ADJUSTED IN 6 MONTHS AFTER THE 5 YEARS? WHAT ABOUT A 6 MO LIBOR? HOW DOES THAT WORK?

Answer 1

LIBOR stands for the London Interbank Offered Rate. It is one of the indexes that an interest rate can be tied to. You are right about the 5/6 ARM and a 6 month LIBOR will just adjust every six months.

Answer 2

LIBOR = London InterBank Offered Rate

In layman's terms, it's the interest rate banks charge each other for the overnight loans they have to do every day. Basically, it's one measure of what their money is costing them.

A 5/6 LIBOR would mean just what you thought. Fixed rate for 5 years. After your 60th payment, your rate would adjust, based on adding the margin your loan has to whatever the current LIBOR index is (6 mo. LIBOR is at 5.314% right now). Most margins start at 2.25%, some are quite a bit higher. So in most cases, when your rate adjusts, if it were to adjust to today's rates you'd be at 7.564%. They generally round UP to the nearest .125%, so you'd likely pay 7.625%.

Your rate would adjust every 6 months after the first adjustment. All ARMs have some type of cap on how much the rate can move on any given adjustment, and also how high it can go ever. Usually, the overall lifetime cap on the rate is 5-6% over whatever your initial fixed-rate was.

A 6 month LIBOR ARM simply means you start off with only a 6 month fixed-rate period, and start adjusting after only your 6th payment. Highly risky, not much benefit in taking a loan like that in today's market, considering you'd adjust to 7.625%, and fixed rates are in the low 6's right now.