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Prime Rate Up; HELOCs Up; PMI Down

Prime Rate Up; HELOCs Up; PMI DownPrime Rate was 3.5% last year at this time. Currently the Prime Rate is 4.25%. It has been climbing steadily with every increase in the Fed Funds Rate.

Prime Rate is the interest rate that large companies pay to borrow funds for short periods. It matters to real estate b/c Home Equity Lines of Credit (HELOCs) are usually tied to Prime. And, most lenders use HELOCs for First/Second Combo financing, when down payments are less than 20%.

The “Margin” on our most popular HELOC (to 90% Combined Loan to Value) is 1.99%, so the fully adjusted rate (Prime + Margin) is now 6.24%. When Prime was only 3.25%, our HELOCs were more appealing and easier to sell.

While Prime has been climbing, Private Mortgage Insurance (PMI) rates have been falling. Hence, it now often makes more sense for borrowers to opt for PMI instead of First/Second combo financing. The exception is when we use combo financing to extend purchasing power outside of conforming loan limits.

Final Point: When short term rates are the same or higher than long term rates, it is called a flat or inverted yield curve. There are rumblings in the financial press that this sometimes portends a recession in the next year or so. But, as we remind everyone often, nobody has a clue about anything anymore in this age of uber-uncertainty, so we’re not holding our breath :).

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 310167