Definition
The prime rate is a benchmark interest rate that banks use to set their lending rates. It’s generally the lowest rate offered to borrowers with the best credit.
Understanding the Prime Rate's Role
The prime rate often influences adjustable-rate mortgages, especially when determining how rates might change. It's a baseline used by banks to set interest rates on various loans. Think of it as a starting point for lenders when they decide how much interest to charge. Example: If the prime rate is 5%, a bank might add a margin of 3%, making the mortgage rate 8%. It's not the rate you'll directly pay on a mortgage, but it affects how rates are set. It doesn't guarantee lower rates for all, as individual factors also play a big role in the final rate offered.
