Definition
Prime rate is what banks charge their most creditworthy customers. The Fed doesn't directly set it, but market forces (based on Fed actions) determine it. While mortgages don't directly follow prime, prime rate changes signal broader market direction.
Not sure where this fits?
Answer a few questions and we’ll open the path that fits, at the right step.
Find my pathAbout this term
The Federal Reserve doesn't directly set the prime rate; instead, the market sets it based on the Fed's federal funds rate. Changes in the prime rate often lead to changes in adjustable-rate mortgage rates and HELOC rates. Mortgage rates (especially for fixed-rate products) don't directly follow the prime rate.
Pro Tip
While mortgages don't directly tie to the prime rate, understanding Fed actions and prime rate moves helps predict mortgage rate trends.
Example
When the Federal Reserve raises the federal funds rate, the prime rate increases, which eventually leads to higher ARM rates for mortgage borrowers.