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What is prime for life?
Prime for life is a type of line of credit in which the margin is fixed above the prime rate for the life of the loan. A prime-for-life loan is highly desirable because the borrower pays the prime rate until the loan is repaid. Only the most creditworthy borrowers qualify for a loan with an interest rate that is fixed at prime.
The prime rate is tied to the federal funds rate, which is set by the Federal Open Market Committee. The FOMC is part of the Federal Reserve, the nation’s central bank, also known as “the Fed.” The prime rate is an index that is tied to the federal funds rate. When the Fed lowers or raises the federal funds rate, the prime rate follows.
Lenders do sometimes offer loans below the prime rate. Auto dealers, for example, might OK car loans with financing at zero percent or other rates way below prime. A home equity line of credit is a product that might have a prime-for-life rate.
Loans that offer prime for life are the opposite of subprime loans, such as a subprime mortgage, which is for borrowers with bad credit. Paying off a subprime loan can be difficult because the interest rate is much higher.
Financial markets play a significant role in determining which borrowers qualify for prime for life. When money is tight, lending criteria become more stringent. When money is plentiful, lending criteria loosen.
Prime for life example
Doc has a credit score of 790 with a flawless payment record and no history of bankruptcy. He applies for a home equity line of credit, or HELOC, and gets one at the prime rate of 4.25 percent. Because of his excellent credit, the bank offers Doc prime for life. Because the prime rate is an index, Doc’s rate will vary as the prime rate moves up or down, depending on what the Fed does. But Doc still will be getting the best rate for the life of his loan.
Use Bankrate’s calculator to determine how much house you can afford to buy.