What Determines Whether Rates on my Home Equity Line of Credit Go Up or Down?

May 08, 2017

Interest rates are driven by the Federal Reserve, also known as The Fed, which is the central banking system of the United States. They set the Federal Funds Rate, which in simplest terms, is the rate at which depository institutions lend each other money.

How does the Federal Funds Rate impact Home Equity Line of Credit rates?

The Fed’s action in moving this rate has an impact on other rates. You might hear the expression “we’re in an increasing rate environment.” That’s primarily because the Federal Reserve is moving the Fed Funds Rate up.

Banks tie their home equity line of credit rates to an index. The most common index used by local banks is the Wall Street Journal Prime Rate. A bank will add a margin to that index rate, most commonly in the range of 0-4%.

How does the Prime Rate and margin work?

For example, you may hear or read that a bank charges a Home Equity Line of Credit Rate of Prime +2%. This means the bank will add 2% to the Wall Street Journal Prime Rate. So in this very simple example, if the Wall Street Journal Prime Rate is 4%, the bank will charge 6% on that Home Equity Line of Credit.

If you have more questions, please visit our HomeLine page, or if you’d like to speak with someone directly, give us a call at (7170 733-4181.