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

If you are near prime rate for your home equity loan, then you are getting a good deal on financing. However, if you are below the prime rate, then you should be concerned about the loan you are being offered.

What is Prime Rate?

The national prime rate is set by the Federal Reserve. It is the interest lenders charge each other for borrowing. The Fed raises or lowers the rate in order to encourage lending and curb inflation. When the rate is high, your loan will be more expensive, because lenders traditionally charge retail borrowers a certain percentage above prime. 

What is Sub Prime?

Sub prime describes any loan quote that is below the national prime rate. Lenders will lose money initially on the loan. However, they will adjust the rate much higher in the future. This means your home equity loan payments will increase after a few years. For many people, the rates are too high, and they can no longer afford the loan. In this situation, you are risking foreclosure. Avoiding sub prime home equity loans is advisable, even if they appear to be good deals. Most of these loans will be extremely costly and can lead to further problems down the line.