Smart Money reports:

“…Many lenders are not making much money off HELOCs. The cut-throat competition during the mortgage boom had lenders slashing rates to well below the prime rate, with no floor on how low they could go, says Frank Ruzicka, a mortgage banker at Cornerstone Mortgage in St. Louis. “I don’t think their models ever predicted that rates would get this low,” he says. Ruzicka’s own HELOC is now at 3%. His lender, Chase, froze his credit line in October 2008.”

Most HELOCs are pegged to the Prime Rate (i.e. they adjust every time this national index rate adjusts). Some HELOCs are a few points lower than prime, some are a few points higher. Creating HELOCs that were a point or so below prime made sense when the rate was around 6%. But, now that prime is at 3.25%, lenders aren’t making much from those credit-worthy borrowers who qualified for the below-prime rates.

For a more in-depth discussion of how HELOCs work in relation to the Prime Rate, see: How to Negotiate the Best HELOC Rates and Terms.

The New York Times reports:

“The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous…

Federal Reserve officials said Wednesday’s action was the first time ever that the Fed had coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.”

Major banks including National City, Wells Fargo, and Wachovia followed suit by lowering their prime lending rates to 4.5%. The prime rate is the rate that is given to the most credit worthy borrowers.

For more information on how this may affect you see: Will Federal Rate Cuts Affect Your HELOC APR?

A federal rate cut would have resulted in lower interest rates on most home equity lines of credit. Almost all U.S.-based HELOC rates are tied to the Prime Rate which, in turn, is pegged to the Federal Funds Rate. Generally, the Prime Rate is 3 percentage points above the Federal Funds Rate.

Current HELOC borrowers would have loved the extra relief. However, the Prime Rate is already at a relatively low 5%. Compare that to 20.35% in December of 1980 and 8.03% in September of last year.

For a more thorough explanation of HELOC rates and indexes see: Will Federal Rate Cuts Affect Your HELOC APR?

You may also be interested in the Federal Reserve’s list of historic Prime Rates.

Keeping track of the prime rate can help you decide when to withdraw money and estimate how much your monthly interest payment will be.

We’ve added a new feature that allows you to keep track of the current prime rate. The tracking page will be updated every time there is a change. Read more…