What is Prime Rate?

There's been a lot of talk lately about “Sub-Prime Mortgage Loans” in the wake of the foreclosure crisis, and many Americans are wondering what, exactly, a sub-prime mortgage is. To understand this, you must understand what the prime rate is, and how it relates to your mortgage.

The prime rate, or Prime Lending Rate, is a term describing an interest rate used as a point of reference by banks and other lending institutions. Normally, the prime rate refers to the interest rate that banks would extend towards favored customers (that is, customers with high credit ratings), although this is not always the case. Therefore, many interest rates are described by their respective relation to the prime rate, either points above or points below.

In the United States today, the prime rate is quite standardized across lending institutions, and although individual banks might vary slightly, most banks adhere to the same rate. The prime rate is usually adjusted by banks at the same time, which means that the vast majority of banks will have the same prime rate. These adjustments are fairly infrequent. As of December of 2008, the prime rate in the United States is 3.25%.

The Prime Lending Rate usually runs about 3% higher than the federal funds rate, which is the rate banks charge each other for overnight loans. Because of this, the Prime Lending Rate is often an extension of the federal funds rate.

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If you have any questions about how the Prime Lending Rate affects your mortgage loan, contact the Maryland mortgage modification lawyers of Chaifetz & Coyle, P.C., by calling 443-546-4608.