Prime Rate

The Prime Rate is the interest rate charged by banks for short-term loans to their most creditowrthy customers. It is also used by lenders as an index for equity lines of credit (ELOCs) in addition to other floating rate loans. Each bank sets their own Prime Rate as they see fit. The Wall Street Journal publishes the Prime Rate that is the base rate on corporate loans posted by atleast 75% of the nations largest banks.

If Alan Greenspan and the Federal Reserve raise the short term interest rates by 25%, you will see a 25% increase in the Prime Rate.

A rate index which is the prevailing rate that banks charge to lend money to corporations.

While the Prime Rate affects Home Equity Loans and short term money, the 30 year fixed mortgage is based off of the mortgage backed security.

Prime rate is the interest rate which banks will charge to their best customers. Any adjustments to the prime rate are publicized in the news and are what moves the indexes in most adjustable rate mortgages, especially HELOCs. Adjustments in the prime rate do not usually affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.

The Prime Rate is affected by the Federal Reserve Boards actions to control inflation. The board will raise or lower what is called the discount rate which directly affects the prime rate. The discount rate is raised when their is a threat of inflation and is lowered when there is a fear of recession.

Unlike the Fed Funds Rate and the Discount Rate, the Federal Reserve does not set a target for the Prime Rate. Nonetheless, when the Fed raises or lowers the target for these two short term rates, Prime Rate almost always follows suit because of the change in the cost of money.

Prime Rate is not directly correlated with mortgage rates but most compensating factors are. So when there is movement in the Prime Rate you will most likely see movement in current mortgage rates.

The Federal Reserve Board also know as the FED is contoled by Board of Governors which consist of seven elected officials. These individuals use many factors when determining whether to lower are raise the rates. In fact if you want to get real technical the FED doesn't actually raise or lower rates. They control the monetary policy which in turn affects the interest rate movement up or down.

Over the last 10 years, the prime rate has averaged approximately 7%.

» DISCLAIMER: The information contained in this article on 'Prime Rate' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.