How Prime Rate Relates to the Fed Funds Rate

Prime Rate is currently 7.750%.

Prime Rate is the "shorthand" name for the Wall Street Journal Prime Rate, a variable interest rate that is used in pricing many types of consumer loans.

These loans include:

  • Home equity lines of credit
  • Credit card loans
  • Auto loans

Prime Rate's variable nature is tied to the Fed Funds Rate.  Prime Rate moves in tandem with the FFR and is always three percentage points higher.

So, after the FFR's 0.500% drop Tuesday, consumer loans tied to Prime Rate dropped by 0.500%, too.

Prime Rate was 4.000% in June 2004 before the Federal Reserve started a string of 17 rate hikes to 8.250%.  Tuesday's drop is the first reversal since the rate hikes began.

 
This post has been included in Maryland Information

7 Comments on How Prime Rate Relates to the Fed Funds Rate

Ilyce - Here's hoping the bigger than hoped for cut will spur some buyer activity!

09/20/2007 09:53 AM by Tom Plant - Murrieta Real Estate Expert - Coldwell Banker Residential Brokerage (Coldwell Banker Residential Brokerage)

Ilyce: Good post. Even though we in the mortgage industry take this knowledge as second hand, that was a succinct explanation for realtors and the general public.

09/20/2007 10:03 AM by Jeffrey Judge (Eagle Nationwide Mortgage)

Thanks Ilyce---for some reason I was getting the Feds discount rate mixed up with the Prime rate. 

09/20/2007 10:16 AM by Wayne Miller (Beach & Luxury Realty, Inc)

many credit cards have limits for rate reduction and may not necessarily go down with the fed cut.

09/20/2007 10:33 AM by Jay Beckingham (Allied Home Mortgage Capital Corp.)

Thank you for the "short hand rate" as I confuse them!

09/21/2007 12:41 PM by Real Estate Specialist | Brandon, FL | Susie Roscoe (Signature Realty Associates)

Ilyce:  Thank you very much for one of the most simple and concise explanations of the relationsip between the Fed Funds Rate and the Prime Rate.  That was well done.     Karen Anne

09/24/2007 01:34 AM by Fort Worth Real Estate - - - Karen Anne Stone (RE/MAX Trinity)

Everyone - Thanks so much for your comments and encouragement. See you on the next blog!

09/24/2007 11:12 PM by Ilyce N. Powell, CMPS™ - Certified Mortgage Planning Specialist (Envision Lending Group)

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Loan Officer: Ilyce N. Powell, CMPS™ - Certified Mortgage Planning Specialist (Envision Lending Group)
Ilyce N. Powell, CMPS™ - Certified Mortgage Planning Specialist
Baltimore, MD
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