The financial term LIBOR is an acronym that stands for London Interbank Offered Rate and can seem complicated to the typical borrower, but we will try to describe it in simple terms at the end of this definition.

However, first I will try to explain the LIBOR by in a little more detail. Keep in mind that I’m still leaving out a lot of detail even in this description, but for the purposes of learning and understanding financial terms and acronyms – this will do.

Keep in mind that the this particular rate index is used often for single home buyers that want a cap on their ARM for protection whereas the COFI ARM does not usually protect consumer with a cap at the periodic times of rate adjustment throughout the term of the mortgage.

Below are some of the set criteria for the LIBOR index:

• the LIBOR is set daily by the BBA (British Banker’s Ass.) between 11 and 12 noon
• the LIBOR is used for several currency indexes – Pound Sterling, US dollar, Euro, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone and New Zealand dollar. Each country has a “currency panel” made up of their own banks which report their average mean rates. These rates are not actual traded interest rates within the market, but simply a benchmark. Confused yet? We’ll break it down easier than this – don’t worry.
• the LIBOR is used to

Now that I have made these basic points, I can give you the actual definition of the LIBOR:

“The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time”

So in very basic terms, each country has a group of banks that report what their rate would be if they borrowed money from a peer bank in their area. Then these reported rates are averaged and rounded to set the country’s LIBOR.

Banks typically offer a LIBOR based ARM at 1 to 10 year terms and 1 to 6 monthly terms. LIBOR based arms are provisioned with caps to stop home owners from dramatically rising rates at the periodic adjustment intervals in the ARM term.

The LIBOR index has come under fire since the credit disaster of 2008 but the BBA naturally claims that the LIBOR is sound – or should I say “Sound as a Pound”

The countries that faired the best in the credit fiasco of 2008 set a national lending rate (or prime rate) on thier own – only using their country’s LIBOR rate as a barometer.