"Would anyone like to ask a question."
As I read the article I noticed that one problem was that their ARM was based on the London rate which I believe is called LIBOR. My equity line is based on the US Prime rate, and I think there are several others, but I don't remember as it has been some time since I bought real estate. I doubt many here know anything about these. Can you explain what they are called and what the differences are?
Prime Rate - the Fed-set rate we all know and love. Few first mortgages are set to this-but home equity lines of credit almost always are
LIBOR - London InterBank Offered Rate - based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale (or "interbank") money market, usually US Dollars.
COFI - Cost of Funds Index - a regional average of interest expenses incurred by financial institutions, which in turn is used as a base for calculating variable-rate loans.
Sure. LIBOR is actually a acronym for London Interbank Offered Rate. As credit markets have evolved to being international in nature the LIBOR has become the primary index. Other indexes are short term Treasuries based or COFI (cost of funds index) or COSI (actually an internal institution index).
LIBOR is a rate established daily, so it's the shortest term index available. It's a volatile rate compared to other indices; it changes fast, both up and down. It reflects more world market rates than US rates. I would guess 90% of prime ARMS (good credit) are LIBOR.
Prime is a rate internal to the US. If you look up a definition it will say it's the rate that banks give their best customers. This is no longer true; businesses, for example, can get a much better rate. Prime is now primarily a consumer rate, primarily used for credit cards and lines of credit, especially home equity lines of credit (HELOC).
Prime is based upon the discount rate, the one rate the Fed controls. That's the rate the Fed charges for overnight loans to banks, used primarily for meeting reserve requirements. For at least the past 10 years the prime has been at 3% over the discount rate. If the Fed moves up 1/4 point, the prime moves up 1/4 point.
ARMs and HELOCs are financial tools, much like a hammer and a saw are construction tools. They can be very useful and beneficial or incredibly destructive. They aren't inherently bad or evil.
If you have an ARM based upon LIBOR you are in good company. If your HELOC is Prime based you are in good company.
That's probably not the rate you're paying, though...variable rate loans, which both ARMs and HELOCs are, have two components, the index (which is Prime and LIBOR) and a margin, which is added on to the index. A typical ARM margin would be 2.25%, so if LIBOR is at 3% your fully indexed rate is 5.25%. Note that fully indexed rate can be higher or lower than your start rate. If you margin on your ARM is higher than 2.25%-2.5%, then it's entirely possible you got gouged on your rate. On HELOCs you should be paying Prime flat, perhaps .25% above or below.
I hope this answered your question.