What is the Prime Rate and How Does It Impact Home Equity and Credit Card Rates?
What is the Prime Rate and How Does It Impact Home Equity and Credit Card Rates?
Author:Sol Nasisi
on May 6, 2010
- modified on October 11, 2018
When looking for a home equity line, an auto loan, or a credit card, you may often run into the Prime Rate. Often, it is used as the benchmark to set these other product rates. What is the Prime Rate exactly and how is it set?
The Prime Rate, also referred to as the US Prime Rate is determined by polling the top 10 largest banks in the US. When at least 7 of the10 banks change their prime lending rate, then a new rate is published in the WSJ. So, the Prime Rate is an index put together from individual bank prime lending rates. It is not a law or a goverment set rate like the Fed Funds Rate. Banks do not have to adhere to it although many do for the sake of simplicity and for allowing easy product and rate comparisons.
Often a home equity line will be quoted as Prime +1. That means you take the prime rate, and add 1% point on top of it.Today's Prime Rate is 3.25% so the rate would be 3.25% + 1% = 4.25%.
The Prime Rate follows the Fed Funds Rate tighly. A rule of thumb for calculating the Prime Rate is the following:
U.S. Prime Rate = (The Fed Funds Target Rate + 3)
Looking at some actual rates, we can see that home equity line rates are generally 0-2% points above prime. The top line rate in Texas is 4.75%, which is 1.50% points above prime. It varies by state. For example, the lowest home equity line rate in New York is 4.25%, or just 1% point above Prime.
You'll also see Prime used quite a bit in variable rate credit cards. If you look at the legal and rate language, it is almost always quoted as so many percenrage points above prime. What been interesting here is that even as Prime has fallen, the credit card companies have not reduced their rates. That means the have increased the spread between Prime and what their cards charge.
When the Fed begins to raise rates someday in the future, look for Prime to go up with it. It's one way the Fed Funds Rate has such an impact on the economy.
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee
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Prime Rate as of 3/16/2020 = 3.25% (Wall Street Journal).
Rates and terms are subject to change without notice. Applications are subject to credit approval. The Annual Percentage Rate (“APR”) is a variable rate and is established based on an Index PLUS or MINUS a margin. The Index is the highest United States Prime Rate as published in the Eastern Edition of The Wall Street Journal ("Prime Rate") on the last business day before the start of each month’s billing cycle. The minimum APR is 3.50%. The maximum APR is 18.00%. The rates shown reflect a 1-to 2 unit owner occupied primary residence, including condominiums. Receive a .25% percentage point rate discount if you choose to make your payment using auto debit from a People’s United checking account. Other terms and conditions may apply. There is a $75 annual fee, which is waived for qualified People’s United Bank checking accounts. There is a prepayment penalty fee of $500 if you close your account within two (2) years after the date of your Note. If the Note is secured by property located in the State of New York, borrower(s) must also pay People’s United Bank back the mortgage tax paid by the Bank at the time of the origination of the Note . Home Equity Lines of Credit are available only for 1 - 4 unit owner occupied primary residences, 1 unit second homes and condominiums in Connecticut, Massachusetts, Maine, Vermont, New Hampshire and select counties in the state of New York and are not available on cooperatives or properties listed for sale. The Home Equity Line of Credit has a minimum line amount of $25,000 and a maximum line amount of $750,000. Property insurance is required. Flood insurance may be required.
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