Like everyone else, Verizon executive Bryan Matthews read the headlines about the rate-rigging scandal involving Libor, short for the London Interbank Offered Rate. Libor is used to set the rate for some 200,000 adjustable-rate mortgages in the U.S. each year and tens of billions of dollars in private student loans. It also affects the interest paid on money market mutual funds and the prices on complex derivative securities. Barclays Bank paid a $450-million fine, and Barclays and other banks face multiple lawsuits for allegedly submitting false interest rates to manipulate rate-setting.
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Nevertheless, Matthews opted for an ARM linked to Libor when he refinanced his York County, S.C., home last summer, because the 2.85% loan offered an attractive monthly payment. Borrowers like Matthews needn’t worry about the accuracy of their loan rates as they adjust, especially if, as some experts have suggested, regulators change Libor to an index based on actual bank transactions.
And the alleged rate-fixing was likely to have been a slight positive for existing Libor borrowers. Banks may have underestimated their borrowing costs, which meant that mortgage and student-loan borrowers received a slightly lower rate than they would have otherwise. But don’t worry, says Mike Fratantoni, of the Mortgage Bankers Association: There’s “no talk of going back and changing people’s payments.”
This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.