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How Prime Rate Affects Home Equity Loans

[May 28, 2010.]

 

What Is Prime Rate?

Prime Rate is an index often used to calculate the adjustable interest rate on home equity loans. Adjustable rate mortgages, such as lines of credit, use an index and a margin to determine the current rate of interest and calculate the monthly payment due.

Prime Rate is a very stable index. The Federal Reserve sets interest rates using the Fed Funds Rate. Prime Rate is usually 3% over the Fed Funds Rate. The Federal Reserve has left the Fed Funds Rate unchanged since December 2008. Prime Rate has been at 3.250% since that time and will remain at 3.250% until the Federal Reserve decides to raise interest rates.

What Makes Prime Rate Change?

Prime Rate will change when the Fed Funds Rate changes. The Fed Funds Rate is determined by the Federal Reserve's Federal Open Market Committee (FOMC). About every six weeks, or eight times a year, the FOMC meets to review data about the economy and determine if interest rates need to go up, down, or remain unchanged.

When Might Prime Rate Change?

The most recent economic crisis, the worst since the Great Depression, caused the FOMC to lower their Fed Funds Rate to 0.000%-0.250% in December of 2008. It has since remained at that level. But, as the economy begins to stabilize and return to normal growth, the emergency measures used to rescue the economy will need to be altered. Once the economy is stable, a higher Fed Funds Rate is expected. Prime Rate will also increase at that time.

How To Calculate The Current Interest Rate On Adjustable Home Equity Loans

To find out what the current rate would be on an adjustable home equity loan, you need to know the index and margin. The index will likely be Prime Rate. The margin could vary depending on the credit score and loan-to-value ratio (LTV) used to qualify for the loan. Prime Rate is currently 3.250%. If the margin on the home equity loan was 2.000%, the fully indexed rate used to calculate the monthly payment would be 5.250%.

How To Calculate The Interest-Only Payment On Adjustable Home Equity Loans

Most home equity loans have interest only payments for a period of time, often five years. For the first five years, the Math used to calculate the monthly payment is very simple: Loan balance x current interest rate / 12. If the loan balance is $50,000 and the current interest rate is 5.250%, the interest only payment for that month would be $218.75.

Home Equity Loans Are Available

If you have equity in your home and would like to access that money to consolidate high interest debts, pay for college, pay medical bills, or make home improvements, a home equity loan is cheap financing. Get information about a new home equity loan today.

 

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.

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