The United States Prime Rate has increased to 4.50% effective December 14, 2017.
What is the Prime Rate?
The U.S. Prime Rate is an index rate that lending institutions use when setting the pricing for short-term and medium-term loans. For example, a mortgage lender might set the pricing for a particular home equity loan product as Prime +1.00%, or for a certain 15 year first mortgage loan to Prime -0.75%.
Whether the pricing for a consumer loan product is above or below prime depends on how risky the loan is determined to be. There are many risk factors to consider such as:
- The length of the repayment term.
- The credit worthiness of the borrower.
- Whether the loan is secured by real property, as is the case with a home mortgage or auto loan.
- In case the case of a secured loan, the percentage of the property’s value represented by the loan amount.
Why Does the Prime Rate Change?
The U.S. Prime Rate is tied to the Federal Funds Target Rate. This rate is determined by The Federal Open Market Committee, a group within the Federal Reserve system. The committee meets eight times a year and takes a great deal of information into account such as the condition of United States financial markets, the current and prospective business climate, and events impacting foreign markets.
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