The "Home Equity Line of Credit", also referred to as a HELOC, second mortgage has become common place among home owners over the last several years. The main reason for the increase in heloc's is the record lows for the prime rate. The prime rate is most simply described as the base rate banks charge their best customers. More importantly is how the prime rate is determined and how it affects your mortgage payment. This article is going to focus on the recent trends of the prime rate and why it is forcing many borrowers to reconsider using a heloc second mortgage for purchase and refinance transactions.

The prime rate is mostly determined by the Fed (Federal Reserve). Recently the Fed has sounded like a broken record at each of their meetings to discuss the economy. "The Fed raised interest rates a quarter percent." Reaching a record low in July of 2003 at 4.00%, since July of 2004 the prime rate has risen a full two percent to 6.00% as of today's date. There could be a whole book written on why the Fed raises and lowers rates, but for the sake of this discussion we will keep it very simple. Keeping inflation in check has been one of the main reasons for the recent increase in rate by the Fed. By raising the prime rate the Fed raises the cost of borrowing money, thus tightening the money supply in the economy and limiting inflation. Think of it this way. When money costs more to borrow, people borrow less and there is less money circulating in our economy. When there is less money to go around the buying power of the dollar increases, thus decreasing the rate of inflation. The record prime rate lows in 2003 was an attempt by the Fed to stimulate our suffering economy by putting more money in circulation and relaxing concerns about inflation.

So as the Fed raise rates the prime rate is directly affected. This does not mean that when the Fed raises rates that your standard 30 year fixed rates will go up as well. In fact, it as been the exact opposite in recent months, as the prime rate increased, long term fixed rates have decreased slightly. Every indication at this moment points to the Fed's continuation to raise rates at each of their meetings this year, which will potentially push the prime rate to as high as seven percent by years end.

For those borrowers who have heloc second mortgages, this trend has many of them rushing to refinance their second mortgage. For example: Michelle Smith originally bought her home for $225,000 a year ago. She put 5% down and borrowed an eighty percent first at 5.875% fixed for 30 years and a fifteen percent heloc second at 5.75% (prime + 1.75%). Now that prime is at 6.00% and heloc's are adjustable, Michelle has seen her interest rate on her second climb to 7.75% and will probably continue to rise. Thanks to the increase in home values, Michelle is now able to refinance both her first and second into one first mortgage fixed for thirty years at 5.50% without mortgage insurance. Not only was she able to lower her interest rate dramatically on her second, she also lowered her rate on her first, and now has just one thirty year fixed mortgage.

There are also plenty of borrowers who have owned their homes for a while and took out heloc's at a later date in order to consolidate debt or make investments. At the time they only had to pay 4.00% on the money they borrowed. These borrowers too can benefit from long term rates staying low as the prime rate continues to rise. Sometimes it make sense to simply refinance your heloc second into a fixed second mortgage so the borrower doesn't have to worry about having their interest rate adjust on their second mortgage. Depending on what rate you have on your first mortgage it is sometimes in your best interest to leave your first mortgage alone. This is why you work with a trusted loan officer to show you which scenario will work best for you and your family.

I hope this article gives you a better understanding of the prime rate and how it affects your mortgage. There are always many other factors used in making any major financial decision, today we only had time to discuss a few. If you have a heloc on one of your properties, now might be the time to meet with your loan officer and consider fixing in your interest rate.