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Is LIBOR Right For You?
While LIBOR-based loans can be highly beneficial and offer substantial savings over other types of loans, they are not for everyone. LIBOR products are a favorite among high net worth borrowers comfortable with fluctuation. However, because these products transfer risk from the bank lender to the borrower, they are not appropriate for homebuyers uncomfortable with risk, and potential volatility, and without the liquidity necessary to accommodate fluctuations. Fortunately, these simple questions can help you determine whether you should consider LIBOR-based products.
1. I am more comfortable owning stocks than bonds.
True | False
2. I am generally comfortable with higher insurance deductibles that result in reduced premiums.
True | False
3. I have a long-range view and feel comfortable with fluctuation.
True | False
4. My finances would not be in jeopardy if my mortgage payment were to increase suddenly.
True | False
5. My monthly cash flow is sufficient to handle spiking increased interest rates.
True | False
If you answered True for every question, you can probably weather the risk of fluctuation associated with LIBOR-based loans, and you may stand to benefit from this instrument. If, however, you answered False for each question, you are probably not a good candidate for a LIBOR-based loan.