CREDIT & MONEY MANAGEMENT


What Borrowers Should Know About the Libor Rate Scandal

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.

SEE ALSO: Lower the Rate on All Your Loans

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.

Editor's Picks From Kiplinger


You can get valuable updates from Kiplinger sent directly to your email. Simply enter your e-mail address and click "sign up".

More Sponsored Links


DISCUSS

Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy


Advertisement
Get valuable updates from Kiplinger directly to your e-mail

Market Update

Advertisement

Featured Videos From Kiplinger