As most everyone knows, the rate on your typical 30-year fixed-rate mortgage will follow the 10-year Treasury Note.

Adjustable-rate mortgages, however, are most often pegged to other indexes (indices?).

You’d hope (especially if you held one of those loans) that your loan would go down (and up) based on the Fed Funds rate, which just dropped to 4.25%.

Nopee.

As the Journal discusses, most ARMs are tied to the LIBOR rate.

LIBO-whooo?

Libor, which is an interest rate banks charge on loans to each other, normally tracks the federal-funds rate closely. But continuing worries over the credit crisis have kept Libor unusually high — partly because banks are reluctant to lend to one another — even as other short-term interest rates have fallen in recent months. The U.S. dollar three-month Libor yesterday was 5.11%, down from 5.36% in late June. Over the same period, three-month Treasury bill yields have fallen much more steeply, to 2.95% from 4.8%.

As many as 99% of subprime ARMs and 38% of Alt-A ARMs are tied to the LIBOR rate (at least, those that were securitized).

Which means these people, the ones who need lower rates the most, are least likely to benefit.

(Not only do most subprime loans track LIBOR, so do most jumbo mortgage loans …)

Source: Why Borrowers May Not Benefit From Rate Cut – By Jane J. Kim, The Wall Street Journal

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