What Does "Prime Rate" Mean for My Home Equity?

The national prime rate is a standard for your home equity loan to be compared against. The rate is set by the Federal Reserve bank, and it represents the interest lenders charge other lenders.

Sub-Prime Loans

Your lender should always charge you a higher rate than the prime; otherwise, you are taking a sub-prime loan. As you may imagine, a lender would not make money on a sub-prime loan if the rate did not adjust. As such, the lender will ask you to sign a variable rate home equity loan contract, and your rates will adjust much higher than the initial interest.

Variable Rates and Prime Rates

Some home equity loans are actually distributed as revolving credit lines, like credit cards. You will elect how much to spend and how much to pay back as long as the line is open. These flexible loans are almost always variable rate loans. You can protect yourself from rates that adjust too high by asking for a loan contract capping the highest possible interest rate. To do so, you can have your lender agree to never allow the interest rate to go a certain percentage over the national prime rate. This keeps your loan rate competitive and prevents unforeseen expenses.

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