A Primer on Prime Rate
When we hear talk of the Federal Open Market Committee (FOMC) adjusting interest rates, there is one index in the mortgage environment that we know will be impacted, even when 30-year fixed rate loans may not see any change to their pricing. This rate is known as Prime Rate and it is the index that is used for most home equity lines of credit, or HELOCs.
If you have a HELOC on your property then it very likely will use Prime to set its base rate, with the addition or subtraction of a margin. Prime Rate itself currently runs 3% above the fed funds rate and adjustments to the fed funds rate are exactly what we hear about when the Fed acts at its meetings. As of this writing (August, 2017), the Fed Funds rate sits at 1.25%, thus Prime Rate is 4.25%. When we make an 80/10/10 loan, or piggyback, the HELOC margin might be 1.99% over Prime, for example. We would take the index (4.25%) and add the margin (1.99%) and our fully-indexed rate would be 6.24% in this example.
Now when we have these discussions a logical next question from the borrower might be, "How high can Prime go?" While it's a fair question, it's also what I call a 'fear question,' and I think it helps to look at the history of Prime Rate to get some sense of perspective. You'll see the levels of the recent past on the chart below and there are many sites that will tell you the entire history of Prime Rate if you search for it.
Prime Rate is an index that is prevalent in mortgage lending. It's used for second mortgages, some adjustable rate first mortgages (ARMs) and other financial products as well. It is referenced often in disclosures and documents you'll encounter during the home loan process. If you have questions or need insight into aspects that could be a concern, get in touch any time and I'll be happy to assist.
Ready for Prime time,
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