Home loans tied to Prime Rate index may see higher rates in 2012

[Mar 13, 2011.]

 

Why is the prime rate important to home equity loans?

The answer is that the prime rate may or may not be important depending on which type of home equity loan. Generally there are two types: a fixed rate second and a HELOC (home equity line of credit). The second type, the HELOC, is an ARM (adjustable rate mortgage) and might be indexed to the prime rate. A fixed second pays out all of the loan proceeds upfront and then has a definite term for repayment. A HELOC can be used and paid back again and again like a credit card.

If you have a HELOC that is indexed to the prime rate, and it increases, your monthly payments would also increase. Read your "note" or "loan agreement" to double check the terms you agreed to when you took out your loan. You may want to consider refinancing your HELOC to a fixed rate second.

Check with an home equity loan specialist now.

Prime rate and recent economic history

The prime rate normally tracks about 3.0 percent above the Fed Funds rate. The Fed Funds rate is one of the Federal Reserve's Federal Open Market Committee's (FOMC) primary tools for effecting monetary policy in the US. The US economy has been weak. In order to stimulate the economy, the FOMC has kept the Fed Funds Rate low since December of 2008. The has kept the prime rate low and HELOCs one of the cheapest forms of financing available.

A higher prime rate could mean higher HELOC payments

The economists responsible for the March 2011 US Economic Outlook, published by the National Association of Realtors (NAR), predict that the prime rate will increase to 4.8 percent by Q2 2012. It has been at 3.25% for more than two years. If the economists at NAR are correct, the prime rate would increase about 1.5 percent in the next year.

An increase that high and that fast means payments for HELOCs could increase a lot. Would you be prepared if your HELOC payment jumped like that? Start budgeting now. If you think the increased payment would be a hardship, consider refinancing to a fixed rate second today.

More information about protecting the monthly payments on home equity loans.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.