Wednesday, July 15, 2009

A floating-rate mortgage

Some commercial mortgages have adjustable, or floating, interest rate. The index on a floating-rate mortgage is typically the prime rate- the rate banks charge their best customers-or, increasingly, the London Inter bank offer Rate-commonly referred to as LIBOR. Floating-rate loan decrease the lender's interest rate risk, which tends to reduce the rates on floating-rate loans relative to fixed-payment mortgage, all else being the same. However, floating-rate mortgage can increase the default risk of a mortgage because the borrower may not be able to continue to service the debt if payments on the loan increase significantly.

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