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How Does The Prime Rate Change Mortgage Rates?

By Bob Redtree

The Prime Rate is essentially an interest rate for the least risky lenders. Mortgage Rates, on the other hand, are rates for consumer loans available to almost anyone in the general market who wants to purchase a house. The pecking order is as follows: the mortgage rate of mortgage loans is always going to be higher than the Prime Rate, and the borrowing rate on Prime Rates will always be higher than the Fed Rate. Prime Rates are available to consumers, but banks will always get the best rates between themselves (Fed Rate).

What is the Prime Rate?

The Prime Rate is a short-term interest rate which defines the average rate of interest being charged on loans. It is generally the Prime Rate which is set aside for the most financially credible consumers. It is used to off-set spending trends, and to stimulate or dissuade consumer spending.

How the Prime Rate is Determined:

When calculating the Prime Rate, first the Federal Rate is taken into consideration, and then everything is decided subsequent to the interest rate on the Federal level. The Federal Rate is the interest rate that banks charge each other for overnight loans, and is usually determined by a panel called the Federal Open Market Committee The prime rate is usually calculated at 3% over the Federal Funds Rate.

How Does The Prime Rate Change Mortgage Rates?

Being that the Federal Rate, the Prime Rate, and subsequently Mortgage Rates are all intercorrelated; when one rate fluctuates, all other rates fluctuate with it. Each has an effect on the other. When the Fed Rate changes, the Prime Rate rises or falls with it; because the Prime Rate is the benchmark by which all interest rates are determined, Mortgage Rates will change with the flow of the determined Prime Rate.

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1. Does The Prime Rate Affect Mortgage Rates?
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5. Why Do Mortgage Rates Change?