What Is the Prime Rate?

If you have been shopping for a car or a home, you may have heard the term prime rate.  Prime rate refers to the best rate at which a financial institution will lend money to its highest creditworthy clients.  These clients are not typically consumers but other large institutions.

As the prime rate moves upward and downward to will trickle down to credit cards, mortgages, and car loans.  Think of the prime rate as the baseline for credit providers to work from.  They increase the rate to account for risk of the type of loan they are providing coupled with your credit profile and ability to pay back the loan.  They also need to factor in their costs to make the loan and their profit as well.

Many consumers have the misconception that the prime rate is set by the Federal Reserve.  Financial institutions set the prime rate but just like the Federal Reserve adjustments are made in reaction to how the economy is doing.  The Fed Funds rate will run a parallel path to the prime rate because they both are reacting to economic news.

The prime rate will affect one mortgage product directly and that is home equity lines of credit.  If the prime rate changes you can almost bet your variable rate on your heloc will as well.  This also applies to credit cards.

While you may not be able to secure a prime rate you can help yourself by having the highest credit score you can, so you receive the most favorable terms to your next car loan or mortgage.  When it comes to mortgages speak to a trusted advisor like the ones at Hall Financial who will answer all your questions and guide you to the best solution for you.