Where does a HELOC rate come from, and how much does a move in prime change the bill?

Summary

A HELOC rate is usually a public index plus or minus a margin the lender sets for you, and for all three lenders here the index is the prime rate. Prime is 7.00%, so Third Federal's "Prime - .51%" works out to 6.49%, while PenFed and FourLeaf start at 7.00% for their best-qualified borrowers. Federal rules require the index to be outside the lender's control and available to the public. On a $50,000 balance, each one-point move in prime changes an interest-only payment by about $41.67 a month.

One formula, worked through

Third Federal Savings and Loan prints its formula on the product page: "Variable APR of Prime - .51%." Its disclosures repeat it: "For home equity lines of credit the margin is prime rate minus .51%." With prime at 7.00%, that gives the 6.49% the bank is showing. There is no teaser period ("The rate you see is the rate you get"), the maximum APR is 18%, the annual fee is $275, and lines run from $10,000 to $300,000 with a 10-year draw inside a 30-year term.

PenFed and FourLeaf don't publish theirs. PenFed says its HELOC APR "is based on prime plus a margin and can change monthly," advertises rates "as low as 7.000%," and notes that rates vary with occupancy, CLTV and other criteria. FourLeaf Federal Credit Union pegs its variable rate to "the U.S. Prime Rate as published in the Wall Street Journal, plus a margin," with a floor of 3.25% and a cap of 18%. Its "as low as 7.00%" assumes a combined loan-to-value ratio of 65% or less, a $25,000 draw at opening and automatic payments, and already includes a 0.25% discount for each of the last two. In both cases the "as low as" figure belongs to the borrower with the smallest margin, and you find out yours after you apply.

What prime is, and what the rules allow

The Federal Reserve's H.15 release defines the bank prime loan rate as the "Rate posted by a majority of top 25 (by assets in domestic offices) insured U.S.-chartered commercial banks," and adds that prime "is one of several base rates used by banks to price short-term business loans." Every day in the latest release shows 7.00%.

Regulation Z says a HELOC lender can't change the APR unless the change "is based on an index that is not under the creditor's control" and the index "is available to the general public." The same section lets a lender write into the original agreement that it may stop new draws or lower the limit "during any period in which the maximum annual percentage rate is reached." So a cap can also be the point at which the line stops working as a line.

The monthly arithmetic

Take a $50,000 balance, interest-only, with the annual rate divided by 12. At Third Federal's 6.49% the interest is $270.42 a month, and at 7.49% it is $312.08. At 7.00% it is $291.67, and at 8.00% it is $333.33. Double the balance and every figure doubles. Contracts differ on how interest actually accrues, daily or otherwise, so the lender's statement will not match this to the penny.

At the 18% ceiling that Third Federal and FourLeaf both state, the same $50,000 costs $750 a month in interest.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.