video: What Is Prime?

 

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.

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