No, we’re not talking about Amazon Prime. In the context of real estate, the Prime Lending Rate – sometimes just called “Prime” – is the interest rate that banks charge each other for overnight loans. Some consumer rates – like ARMs – are set in relation to Prime.
In the US, Prime is affected by the Federal Reserve lending rate to banks; historically, Prime is about 3 percent above the Fed rate.
The video shows an example:
- The Federal Reserve loans to Bank A at 1%
- Bank A loans to Bank B at 4%
- Both banks – A & B – will recalculate variable-rate loans like ARMs on that 4% Prime figure.
ARM rates are frequently defined as “% above Prime” – that gap is usually called the “margin” or “spread.” Just remember those 3 layers in Prime: Federal Reserve, Bank A, Bank B, and finally, YOUR rate.
At Title Junction, we care about helping you stay informed throughout your real estate transaction. The experts at our title company have extensive knowledge about real estate not only in Cape Coral and Fort Myers, but all of Florida as well.
Have questions? Give us a call at 239.415.6574.
In case you missed it, check out our last Title Junction post: Should You Escrow Your Property Taxes?