Inter-bank lending rates in free-fall since October

Why are Libor rate declines a good thing?

1) Back in October, all we heard was that banks would not loan money to each other... that the credit markets were "frozen."  Well, that is no longer the case -- short term lending is on the rise as indicted by the falling international LIBOR rates.

2) Many adjustable mortgages and home equity lines of credit (HELOC) are set by the LIBOR as their INDEX.

Let's say that one fine borrower has a HELOC on her home for $50,000 and that her interest rate payments are set by the LIBOR index + 2%.

See the charts below.  Back in October her interest rate would have been 6.3%.  But this month her rate will be somewhere south of 4.3%...

On her $50K note, her interest payment was $263 on October 15.  But on her payment due today she only owes $179.  That's $84 more for her pocket this month.  

Will she save it?  Pay down the principal on her note?  Or buy me a nice Christmas gift?  

I'd say any of those senarios are good news to her.

12 month Libor

6-month Libor