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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Rates/terms are subject to change. All offers of credit are subject to credit approval. Applicants may be offered credit at higher rates and other terms. Property insurance (including flood insurance, if applicable) is required. HELOCs not offered in Texas. Membership at FourLeaf is required by opening a minimum $5 share account.
Rates shown are based on primary residence, minimum initial draw of $25,000 at account opening, monthly payments via automatic transfers from a FourLeaf checking/savings account, and borrower(s) inputs for credit score and Combined Loan-to-Value.
If borrower(s) qualifies for an intro rate, the intro APR is fixed for 12 months. After, standard APR is variable based on the U.S. Prime Rate, plus a margin, and is subject to increase. To obtain an intro rate, borrower(s) must meet credit/loan program requirements, including (but not limited to): 1) maximum CLTV of 75%, 2) minimum credit score of 720 3) initial draw of $25,000 and maintain this balance for 12 months, 4) monthly payments via automatic transfers from a FourLeaf checking/savings account, and 5) have not had an intro rate within the past 5 years. Loan amounts over $500,000 are not available for the intro rate.
The standard APR is variable based on the U.S. Prime Rate as published in the Wall Street Journal, plus a margin (if applicable), and is subject to increase after consummation. The current standard APR ranges from 7.50% - 18.00% as of 4/16/2025. Not all applicants will qualify for the lowest rate. The minimum floor APR is 3.25% and maximum is 18%. Prime Rate as of 4/16/2025 = 7.50%. Closing costs for the first $500,000 will be paid by FourLeaf but must be repaid by the borrower(s) if the HELOC is closed within first 36 months of account opening. Fees generally range between $500 - $15,000. Borrower(s) will be responsible for mortgage-related taxes and title insurance costs on the line amounts over $500,000. Fees generally range between $500 -$60,000.
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