The prime interest rate is the rate U.S. banks charge to their most creditworthy customers. It is also called the prime rate, prime lending rate, or simply “prime.”
The fed funds rate, determined by the Federal Reserve, determines this rate.
How the Prime Interest Rate Affects Your Loans and Investments
Banks typically set the prime rate three percentage points above the federal funds rate.
The prime rate is significant because it determines many other interest rates, such as adjustable-rate loans, interest-only mortgages, and credit card rates.
Lenders frequently add a percentage to the prime rate to offset potential losses on unpaid loans.
Credit cards are considered high-risk loans. Interest rates on these fluctuate, heavily influenced by the prime rate. So, when the prime rate rises, credit card rates also increase. You receive a bill with higher monthly payments. A fall in the prime rate, on the other hand, results in lower borrowing rates for customers or lower interest payments.
The prime interest rate plays a crucial role in the housing market. Adjustments in the prime rate can influence mortgage rates, impacting the affordability of home loans and potentially affecting the decisions of homebuyers and sellers.
Buyers and sellers of real estate should closely monitor changes in the prime interest rate and the fed funds rate. These rates are closely tied and can affect transactions and overall market conditions.
Additionally, the prime rate influences the liquidity of financial markets. Lower prime interest rates make loans more affordable and available, improving liquidity. Low rates promote economic growth by allowing firms to thrive and the general economy to prosper. Conversely, higher prime rates restrict liquidity, which can curtail growth.
Note: The prime rate is not the sole factor influencing interest rates. Other interest rates, such as those for 30-year mortgages and corporate bonds, are determined by Treasury notes.
What To Do Now
The prime interest rate affects credit card rates, home loans, and other borrowing costs. It also influences your investments in financial markets, as they determine liquidity.
Before making any financial decision, you should check today's prime rate. Compare it to past rates to see if it is rising or falling. Sometimes it's better to wait for the prime rate to change before taking the next step.
Since the prime rate follows the fed funds rate, you should also take a look at the Federal Open Market Committee meeting schedule. You don't want to make a decision, and then find the fed changed its rate the next day.
When making important financial decisions on selling your home or buying one, consult a real estate advisor who can best counsel you with the prime and fed funds rate trends in mind.
