Prime Rate

The interest rate that banks charge to preferred customers. Changes in the prime rate are publicized in the business media. Prime rate can be used as the basis for adjustable rate mortgages (ARMs) or home equity lines of credit. The prime rate also affects the current interest rates being offered at a particular point in time on fixed mortgages. Changes in the prime rate do not affect the interest on a fixed mortgage.

Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i. e. , those with high credibility, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate. Historically, in North American banking, the prime rate was the actual interest rate although this is no longer the case. The prime rate varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with frequency. The prime rate is currently 3. 25% in the United States, and the Canadian prime rate is currently 3.00%. In the US, the prime rate runs approximately 300 basis points (or 3 percentage points) above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements: (federal funds rate) + (3 %) = (prime rate). The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers today, as is LIBOR, the London Interbank Offered Rate. The Federal Open Market Committee (FOMC) meets eight times per year wherein they set a target for the federal funds rate. Other rates, including the prime rate, derive from this base rate. Prior to December 17, 2008, when 23 out of 30 of the United States' largest banks changed their prime rate, the Wall Street Journal would change its published rate. On December 17, 2008, the Wall Street Journal recognized that fewer, but larger banks controlled most assets and changed the methodology for the prime rate that is published. The Journal's rate today now reflects the base rate posted by at least 70% of the top ten banks by assets. Since December 17, 2008 the WSJ's U. S. Prime Rate has been 3. 25%. For adjustable rate mortgages (ARM), the interest rate is 1, 2, or 3 % above the prime rate. The prime rate is used often as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short term loans. It is used in the calculation of some private student loans. Many credit cards and home equity lines of credit with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread or margin.