When looking for a home equity line, an auto loan, or a credit card, you may often run into the Prime Rate. Often, it is used as the benchmark to set these other product rates. What is the Prime Rate exactly and how is it set?

The Prime Rate, also referred to as the US Prime Rate is determined by polling the top 10 largest banks in the US. When at least 7 of the10 banks change their prime lending rate, then a new rate is published in the WSJ. So, the Prime Rate is an index put together from individual bank prime lending rates. It is not a law or a goverment set rate like the Fed Funds Rate. Banks do not have to adhere to it although many do for the sake of simplicity and for allowing easy product and rate comparisons.

Often a home equity line will be quoted as Prime +1. That means you take the prime rate, and add 1% point on top of it.Today's Prime Rate is 3.25% so the rate would be 3.25% + 1% = 4.25%.

The Prime Rate follows the Fed Funds Rate tighly. A rule of thumb for calculating the Prime Rate is the following:

U.S. Prime Rate = (The Fed Funds Target Rate + 3)

Looking at some actual rates, we can see that home equity line rates are generally 0-2% points above prime. The top line rate in Texas is 4.75%, which is 1.50% points above prime. It varies by state. For example, the lowest home equity line rate in New York is 4.25%, or just 1% point above Prime.

You'll also see Prime used quite a bit in variable rate credit cards. If you look at the legal and rate language, it is almost always quoted as so many percenrage points above prime. What been interesting here is that even as Prime has fallen, the credit card companies have not reduced their rates. That means the have increased the spread between Prime and what their cards charge.

When the Fed begins to raise rates someday in the future, look for Prime to go up with it. It's one way the Fed Funds Rate has such an impact on the economy.

Now that the mortgage rates are beginning to increase, the federal government is looking for other ways to help troubled homeowners stay afloat and avoid foreclosure. One of the latest plans includes details that will help shrink the value of homes so fewer homeowners will be “underwater” in their mortgages and the ones who are still underwater will have a mortgage that is closer to the actual value of their home.

The Obama administration is setting aside $14 billion from the recent $75 billion foreclosure prevention program to help homeowners in this predicament. According to Trevor Hahn, the branch manager of Allied Home Mortgage Capital Corporation, the new plan will “help homeowners more than it will hurt homeowners.” He added that there are many homeowners in mortgage contracts who could benefit from having lower balances on their homes. The way the program is going to work is this: The government plans to pay mortgage lenders in exchange for lowering the balance of mortgages for homeowners who have been paying their bills on time. The lenders will also receive government money for reducing balances on home equity loans and second mortgages. The plan is also designed to give up to six months of financial relief to homeowners who are currently unemployed or negatively affected by the recent economic problems.

While this may sound like a great plan, critics of the administration’s loan modification program are not excited about it. Thomas Smith, president of Amerihome Mortgage Corporation, said their hearts are in the right places, but they have already messed up when it comes to the paperwork and other requirements. Supporters, on the other hand, thing the plan could help millions of Americans who want to realize the dream of owning their own home within their lifetime.

One story helps put this situation in perspective. Fred Peterson of Lynn, Massachusetts is underwater on his mortgage just like 15 million other American homeowners. He refinanced just three y ears ago and now owes more than $540,000 on a home that would only sell for about $350,000 these days. He says he just needs some “breathing room” so he can catch up on his payments. The administration’s new plan may just be that breathing room that Peterson and millions of others need in order to become current on their mortgage payments and pay off their home in a reasonable amount of time.

Do you think this new plan is worthwhile or is it set up for disaster? Let us know your thoughts below.

It may be tempting to get a home equity loan to pay off some bills, do some remodeling or just to have some extra cash in your account. Many times, a home equity loan is the ideal way to fund these situations. However, you have to be careful because many people and companies are out to scam homeowners out of thousands of dollars. Here are some scams that have been going around for years that you should be aware of so you do not fall victim to them.

Balloon Payments
Balloon payments are not in themselves a scam, but the way a mortgage company charges you a balloon payment may be. There are several mortgage companies out there who claim they can "save you" from foreclosure. The way they do this is to refinance your home with lower payments each month that you can afford to pay. However, what they don't tell you (except in the very very fine print) is that you will be responsible for a balloon payment at the end of the loan term. This balloon payment will include all the money that you owe from paying the reduced payments over the years. If you cannot pay this payment, you will be facing foreclosure once again.

Stripping
Stripping is when a shady lender will tell you to "pad your income" when you are applying for a mortgage loan. These lenders are not concerned about you paying your mortgage. They couldn't care less about your ability to pay the monthly payments because they will just foreclose on your property. This goes for home equity loans, too. If you become a victim of this type of scam, your home equity can essentially be "stripped" and you will be left with nothing after years of trying to build it up.

Relinquishing the Deed to Your Home
If you are facing foreclosure and seeking help through mortgage lenders, some shady ones may tell you to simply sign the deed to your home over to them. This will be, according to them, just for a short period of time to help prevent having your home foreclosed upon. Unfortunately, once you sign the deed over, you may never get the home equity loan you were expecting from the company. What's even more is that the mortgage company may have borrowed against your home or sold it to somebody and you have no recourse because your name is no longer on the deed. You may be charged rent instead of mortgage payments and all of your equity is ruined. The company that now holds the deed may even have the legal right to kick you out of your own home.

In essence, keep these tips in mind to prevent yourself from falling prey to these scams: only agree to a loan if you have a stable income and you can afford the payments, read anything before signing your name to it and never cave to pressure from a company that wants your home's deed. Check with the Better Business Bureau and other resources before working with a home equity mortgage company to find out if they are reputable or if they have complaints filed against them.

It’s no secret that the housing market has been in trouble for several months now. That manifests itself in several different ways. One of the ways is that there are fewer and fewer people applying for mortgages these days. According to a report in Reuters, the number of mortgage applications being submitted has declined for the third consecutive week. In fact, the demand for housing loans is at the lowest level it has been at in 13 years.

Analysts use the demand for housing loans as an early indicator of how the home sales are going to fare in the near future. If the decline in loan applications is dropping as much as it has been lately, analysts are concerned that the housing market may get even worse than it is now. The market is already vulnerable and it seems like there is setback after setback just making things worse. How much more can the current market take?

According to the Mortgage Bankers Association, there has been an 8.5 percent drop in the number of seasonally adjusted mortgage applications. This includes refinancing applications and purchase loan applications. These numbers show that the demand for housing is still fairly weak. Michael Fratantoni, the vice president of research and economics for the MBA, also said that the “abundant inventory” or homes causes potential buyers to think that there is no urgency in locking in their purchase price. They know there are enough available homes to go around and there will probably be one for the same great price or below if they decide to wait.

A main reason for the drop in application numbers is probably due to the increase in mortgage rates recently. The MBA announced that the costs for borrowing on a 30-year fixed-rate mortgage averaged about 5.03 percent in the week ending on February 19. That figure is nearly a tenth of a percentage point more than the average for the previous week for the same type of mortgage. The all-time low for mortgage rates was set nearly one year ago when they were 4.61 percent during the end of March. For a 15-year fixed-rate mortgage, the current rates are averaging about 4.35 percent for the week ending February 19. Those numbers are up by about 0.02 percent from the week before.

If you have been considering buying a home recently, have you been putting it off for any particular reason? If so, what are your reasons? Are the mortgage rates going too high? Are you taking time to make your decision because of the number of homes available on the market today? Let us know your reasons below.