Most homeowners probably don't know what it is--or even how to pronounce it. But the London Interbank Offered Rate, or Libor, is having a noticeable impact on adjustable-rate mortgages.
The reason: It's rising--and fast. Thie week, the three-month Libor rate for dollar-denominated loans hit 5.72%, the highest level in over six years.
The increase is also making it harder for big acquisitions to get completed and hurting the ability of companies to get short-term financing for ongoing operations.
With that in mind, here's a look at what's going on with Libor and why you should care about it.
What is Libor?
Libor (pronounced LIE-bore) is the interest rate global banks charge each other for short-term loans outside of the U.S. It's also used as a benchmark to calculate everything from adjustable-rate mortgages to what companies pay for short-term borrowing in the credit markets. It's similar to the federal funds rate in the U.S., an overnight bank rate set by the Federal Reserve, in that it affects a lot of other interest rates.
Why did Libor go up so much?
More banks are reluctant to lend money to each other because of worries about subprime mortgage exposure and other credit problems. So banks are forced to pay a higher interest rate to borrow money.
Short-term cash is also harder to come by because of the near freeze-up of the asset-backed commercial paper market, where companies borrow money. As with any case of supply and demand, a shortage of available cash means it'll cost you more to borrow it. So interest rates go up.
How does this affect homeowners?
Libor is among the most common benchmarks used to set adjustable-rate mortgages. Anyone whose adjustable rate is being reset now could end up paying a half point more than just a month ago.