LIBOR
Definition and meaning of LIBOR in real estate.
LIBOR, which stands for the London Interbank Offered Rate, was a benchmark interest rate at which major global banks lent to one another in the international interbank market. For many years, it served as a primary index for calculating interest rate adjustments on adjustable-rate mortgages in the United States.
In more detail
When a borrower obtained an adjustable-rate mortgage tied to this index, their interest rate would rise or fall based on the movement of global rates. Due to manipulation scandals and structural changes, financial regulators phased out the index globally in recent years. Most mortgages that previously relied on this rate have transitioned to the Secured Overnight Financing Rate, which is based on actual transactions in the Treasury repurchase market. Understanding how indices work helps borrowers evaluate the volatility of adjustable-rate loans.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Status | Phased out globally in recent years |
| Replacement index | Secured Overnight Financing Rate (SOFR) |
| Primary application | Adjustable-rate mortgages and business loans |
A homeowner with an older adjustable-rate mortgage saw their interest rate transition from a LIBOR-based calculation to a replacement index, such as the Secured Overnight Financing Rate, following the benchmark's retirement.
Frequently asked questions
Why was LIBOR replaced?
Regulators phased it out due to a lack of actual transaction data and vulnerabilities to manipulation by participating banks.
What happens if my mortgage still lists LIBOR as the index?
By law, your loan servicer must transition the loan to a comparable replacement index, which is typically the Secured Overnight Financing Rate.