Now, you’re probably wondering about what London has to do with the real estate market in the United States. LIBOR reflects the interest rate that international banks charge on the London currency markets for borrowing U.S. dollars. For your adjustable mortgage, LIBOR rates move quickly and can result in unstable interest rate movements. Indexes are important because they establish the basis for the interest rates charged on your loan. Assume that you are applying for a LIBOR index-based adjustable-rate mortgage. Assume that when you apply, the LIBOR rate is 2.2 per cent. Your starting interest rate is 2.2 per cent. If, within eight months, the LIBOR shoots up one percent, your loan will do the same. Importantly, it is not the interest rate you will pay that the index rate used for your loan is. Instead, at the top of the index rate, you have to add the bank margin. visit
On top of the index rate, most banks will charge two to three per cent. The initial interest rate of your loan would be 2.2 percent plus whatever the bank is using as a spread, using our LIBOR example. Obviously, this means that to figure out how the game is being played, you need to read the loan documents closely! How does inflation influence your decision to invest in real estate assets? The following values were assumed in our case here: $2,000,000 loan size and $2,000,000 property value, 30-year term, 5.30404 percent mortgage rate and 0 percent percent inflation rate. This will produce a nominal value of $2,000,000.00 total interest paid, and a present value of $2,000,000.00 total interest paid. There will be a total interest of $1,291 million that you are going to pay. This is not, as the above case assumes, $2 million. If you are going to calculate a zero-inflation rate and assume a 4.5 percent value, you will only pay about $1,291 million.