Prime Rate Home Equity Loan

How to find the right prime rate home equity loan. Interest rates are a big consideration when shopping for a loan. In order to qualify for the best rates, like a prime rate home equity loan, most lenders require you to have very good credit history.

In Canada, the prime lending rate is a guideline rate banks charge on loans for their most qualified clients. The minimum interest rate a bank actually charges may vary from one lender to another.

Banks and other mortgage lenders use the prime rate as a guideline to remain competitive. But, it is just a guideline and they are free to add or subtract a percentage or two from the current prime rate.

There are 2 types of Prime Rate Home Equity Loans:

  1. A Variable or Adjustable Mortgage (closed or open)
  2. A Home Equity Line of Credit

When the prime lending rates are high, many lenders offer rates lower than prime, and when rates are very low, they may add a percentage to the prime rate. This allows lenders to remain competitive, but still adhere to the fluctuating prime interest rate.

Prime rate home equity loan

What Influences the Prime Rate?

The main influence on the prime rate in Canada is the economy. The Bank of Canada adjusts the rate directly according to current economic conditions. It decides what the prime rate should be and for how long. This is vital to Canada's growth and stability.

The Bank of Canada will typically increase or decrease the Bank of Canada Prime lending rate based on how inflation is changing. If inflation is raising, then the Bank of Canada will increase the prime lending rate to slow down the economy.  If inflation is falling, then the Bank of Canada will decrease the prime lending rate to help stimulate the economy.

Highs and lows in the economy directly affect the spending power of banks, businesses and consumers. Various factors influence these ups and downs, such as jobs being lost or created, manufacturing booms or busts and exportation. These economic factors affect inflation.

With high inflation, the prime rate is quickly raised to make borrowing more expensive. This cools the economy and controls inflation. Likewise, when inflation rates drop, the prime rate is lowered to encourage borrowing. Lending and borrowing is a fact of everyday life, both for you personally and for the country as a whole.

Very few people, from the smallest household to the largest corporation can survive without some borrowing. This means there have to be an adequate supply of lenders.

Lenders make money from the borrowers; borrowers make money from the businesses they work for; businesses make money from other consumers. All of this lending, borrowing and spending keeps the money flowing, and it is all an endless circle of money being passed around and around. 

The easiest way to get money is with a home equity loan. Your home builds equity with every mortgage payment you make and with natural appreciation. Historically, the average home appreciates about 5 percent every year. This means that every year your home is worth about 5 percent more than it was the year before.

A prime rate home equity loan is usually the cheapest type of loan you can get. And you can use the money for anything you like.

How Does The Prime Rate Affect You?

Businesses and consumers can't always pay cash for everything and must borrow, especially for high ticket items. This is where the prime rate becomes vital. The prime rate affects everyone in some shape or form, not just the borrower and lender.

Prime rate home equity loans depend on the economy

The prime lending rate has a big influence on home equity loans and the mortgage market, as well.

The prime rate is used when calculating and lending money on home equity variable rate loans or line of credit equity loans.

A variable rate loan is typically offered for a set period of time, either for a 3 or a 5 year term. Depending on the current economy and the availability of mortgage funding during a particular cycle, home equity loans and variable rate mortgages will usually be the prime rate less a set percentage.

For example, when the prime rate is 3.00 percent, you may qualify for a closed variable rate mortgage at 2.90 percent.

A line of credit equity loan will typically cost the prime rate plus a set percentage. Credit lines are very popular methods of borrowing. Generally, all lenders follow the same basic prime rate lending strategy. You won't find much variance from one lending institution to another.

Whether you are looking for a prime rate home equity loan or a line of credit, you will find both are heavily based upon the current prime rate. Whenever the prime rate changes, you can expect the calculation used for your variable interest rate loan or line of credit to be adjusted.

Understanding how the prime rate is used and how it affects our monetary system will go a long way to helping you decide which option is best for you when borrowing money.

Be Informed

Don't be a naive borrower who jumps at whatever mortgage rate a lender offers. Arm yourself with knowledge. Contact a mortgage broker or a financial professional that is only interested in doing what is best for you. Choose someone with experience and established relationships with a wide variety of lenders.

The type of mortgage or prime rate home equity loan you get will significantly affect your bottom line. This is one time to throw your shyness out the window. If there is a glimmer of doubt, or anything you do not fully understand, ask.

Remember, this professional is only here to help you and to find the absolute best solution for you. If he can't help you, he doesn't get paid.

Not understanding all of the details about the mortgage industry is nothing to be ashamed of. If everyone understood everything, mortgage experts would be out of business.

A professional mortgage broker can help you to understand the differences between the various banks and prime rate home equity loan offers that are available. He can help you find what you need.

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