Are Libor ARMs a good deal?

Libor ARMs are only a good deal if the savings on the front end outweighs the risks of increased rates and payments later on.

Libor stands for "London InterBank Offer Rate", and is the interest rate offered on banks in London which have large deposits of US money. The rates are fixed for a set time-period; typically 1 month, 3 months, 6 months, and 12 months. After that, rates are adjusted based on the current value of the Libor, plus a pre-determined margin.

For example, suppose you have a 3-month Libor ARM with an introductory rate of 3.15%, and a margin of 1.5%. At the end of the first three months, your new rate will be 1.5% plus the current rate of the 3-month Libor. So if the current rate is 3%, then your new rate is 4.5%.

If you're considering a Libor ARM, find one that has an adjustment cap. Using the above example, if you have a rate cap of 1%, then your new rate is only 4.15%.

We recommend that you compare the features of a Libor to other ARMs before making a final decision. You need to do a careful comparison of rates, margins, and adjustment caps, in addition to other features. And, as always, we recommend that you talk with a reputable mortgage broker.