Understand Florida Home Equity Loan Rates

Rates. They can be a confusing issue within the financial world.

Let’s take the example of someone that recently applied for a home equity line of credit, suppposedly with a variable interest rate 0.25 percent less than the prime rate. This individual then discover he’s being charged 7.5 percent, despite the prime rate standing at just 5.25 percent.

The bank then states the prime rate is now 8 percent, but cannot explain the discrepancy between the 5.25 percent and 8 percent prime rates. The question on this owner’s mind: what the heck is going on?

Know rates on Florida home equity loans

Many people confuse the Federal Reserve Board’s targeted federal funds rate with the prime rate. The Fed just raised the fed funds rate to 5.25 percent from 5 percent at the end of June.

But the prime rate is a publicized rate that, in recent history, has been 3 percent ABOVE the targeted fed funds. Typically, the two rates move in conjunction with one another through time. That puts the prime rate at 8.25 percent now, while the interest rate on this Florida home equity loan is at 8 percent.

Because fed funds is the interest rate that banks charge each other to borrow bank reserves, it’s roughly equivalent to your bank’s cost of funds; and a bank can’t afford to lend money at 0.25 percent less than its cost of funds. Therefore, it sounds as though the bank is correctly changing the interest rate on this home equity line of credit - 0.25 percent less than the prime rate.

In other rate news, buyers should be happy about this fact: Florida home loan rates have declined for the first time in weeks.