How The Prime Rate Affects Mortgage Interest Rates

Most people assume that when the prime rate goes up, mortgage interest rates quickly follow. While there is not a direct correlation between the two, the prime rate can indirectly influence many mortgage loan rates.

Prime Rate

The prime rate is based largely on the federal funds rate, tracking about 3% higher than the Federal Reserve rate, and is the commercial short-term interest rate. It is often referred to as the rate that non-bank entities and consumers with the best credit ratings can borrow money from banks.

The Wall Street Journal surveys 30 major banks and re-calibrates the rate every time three-quarters of those banks change their rates. Because of this frequency, the WSJ Prime Rate is one of the most widely accepted current prime rates.

Which Rates Are Affected by Changes In the Prime Rate

While credit card, auto loan, home equity and other short-term loan rates are directly affected by the prime rate, most long-term loans such as 30 year fixed-rate mortgage loans are only indirectly influenced by changes in the prime rate. The exception is adjustable rate mortgages (ARMs), which are directly affected by changes in the prime rate.

How The Prime Rate Affects Mortgage Interest Rates

Mortgage rates are generally determined by economic factors rather than the federal funds rate or the prime rate. The supply and demand for new homes and the supply of money by the Federal Reserve both influence the mortgage interest rate.

When the Federal Reserve increases the supply of money circulating in the economy, market interest rates are pushed lower to encourage economic activity. When the supply of money is decreased, the rates will rise.

A high demand for new homes, especially with low supply, will generally push mortgage rates up, while a lower demand for homes will push the rates down.

While seldom used as a mortgage index, the prime rate does indirectly influence mortgage rates. The prime rate is an important national benchmark which reflects the “mood” of the economy. As the prime rate moves up in response to a federal funds increase, short-term consumer loan rates, home equity loans and adjustable rate mortgages follow suit. Fixed mortgage rates will historically move up as well, although there is usually a delay, or “lag-time” between changes in the prime rate and changes in the 30-year fixed mortgage interest rate as they are not directly tied together.

Conclusion

While the Federal Reserve rate and prime rate directly affect short term loans, they also indirectly influence fixed mortgage rates eventually. If you are considering buying a new home and are following the prime rate increases wondering if mortgage interest rates will follow, you can expect that they will eventually move up, especially if there is a high demand for housing.

With new home prices going up in 2018, a high demand for housing, and the prime rate increasing to over 5% last year, it’s better to act now instead of waiting, to avoid paying a lot more for a new home later.

The post How The Prime Rate Affects Mortgage Interest Rates appeared first on McKee Homes Blog.


Keep up to date On Instagram

PREVIOUS
NEXT
Want security in buying your home? Waiting to buy a new home in order to see what the market does?

Check out our falls savings event through October 31st 🍂 featuring our 3-2-1 buy down program 🏡
 ▪️ Lower monthly payments for up to THREE years!
 ▪️ Rate locks! 
 ▪️ $3,000 in closings costs!
 ▪️ …. and more!

Check out our beautiful new home opportunities throughout the Triangle, Wilmington, Fayetteville, & Pinehurst areas …. and book your tour today!

There’s no better time to build your #LifeChangingMoment!

www.McKeeHomesNC.com | (910) 672-7491
Save the date 📅 We would like to invite YOU to be a part of the Triangle Parade of Homes!

We are excited to announce that our HightRidge model home will be in the parade! HighRidge is in a quiet country setting just minutes from downtown Fuquay Varina, and features our beautiful Epcon collection of single-family floorplans, including this Promenade 🏡 

Join us throughout the following three weekends⤵️
 🗓️ October 1-2, 7-9, 14-16
 ⏰ 12pm-5pm
 
This event is free & open to the public, we hope to see there 🎉
We’re exited to welcome our FIRST homeowners to the Walk at East Village! 🏠

The Walk at East Village is a 55+ community in Downtown Clayton, NC built for an active retirement lifestyle! 

This elegant community features numerous resort-style amenities including a grand clubhouse with a pool, fitness center, sports lounge, pickleball & bocce courts, walking trails, and countless other recreational and social activities. 

Book your tour today! #WeBuildLifeChangingMoments
New South Bridge is down to its FINAL OPPORTUNITIES!

The beautiful coastal community is in great proximity to beaches and quaint coastal towns such as Southport and Shallotte, making this a perfect location for family fun or retirement heaven.

Homeowners can enjoy:
◻ Up to 1,788 SF
◻ 3 Beds | 2.5 Baths
◻ 9-hole golf course ⛳
◻ Pool with clubhouse 🏊
◻ Boat storage area 🚤
◻ Scenic walking trails 🚶

Book your tour before these opportunities are gone! 🔥
Make this a September to remember! 🏡

Check out our new home opportunities throughout the Triangle, Wilmington, Fayetteville, and Pinehurst areas!

Build your #LifeChangingMoment with McKee Homes!

Pssst … we have BOTH showcase and presale opportunities available 👀
🚨 New Community 🏘️

Stop by for a visit at our newest Fayetteville-area community, WoodsRun!

WoodsRun is conveniently located in Raeford, NC near Fort Bragg, Fayetteville and minutes from the Pinehurst area!

This exclusive 13 homesite community offers:
 ☐ Single-family homes from the $300’s
 ☐ 2,363 - 2,929 SF
 ☐ 3 - 4 Beds
 ☐ 2 - 3 Baths

Check out what this community has to offer YOU! Book your tour today!
REALTOR LUNCH❗

Come visit us at our Townes at Gateway Commons Community, located in Wake Forest!
🗓️ Tuesday, August 30th
🕐 11AM - 1PM
📍 509 Gateway Commons Circle, Wake Forest, NC 27587

Join us for refreshments, model home & community tours, and learn more about these beautiful quick move-in townhomes!
❗ New Triangle-Area Community - Join Our Interest List ❗

The Walk at East Village is a 55+ community in Downtown Clayton, NC built for an active retirement lifestyle! 

This elegant community features numerous resort-style amenities including a grand clubhouse with a pool, fitness center, sports lounge, pickleball & bocce courts, walking trails, and countless other recreational and social activities. 

Pssst .. lawn maintenance is also included! 🏡

Located approximately 15 miles from downtown Raleigh, NC, you’ll have easy access to great restaurants, shopping, museums, entertainment venues, sports, and leisure!

For more information and to join our interest list visit the link in our bio!
Team McKee was excited to attend a breakfast for the Walk to End Alzheimer’s Corporate Partners in the area! Special shoutout to Rachel for being an amazing speaker, and discussing McKee Homes’ involvement within the Alzheimer's Association®. Thank you for all you do Rachel and Julie!

Are you interested joining the fight against Alzheimer’s? Join us in helping the @alzassociation achieve their vision of a world without Alzheimer’s? Send us a message or visit the link in our bio!
Have you heard about McKee Homes’ newest Fayetteville-area community, WoodsRun?!

WoodsRun is conveniently located in Raeford, NC near Fort Bragg, Fayetteville and minutes from the Pinehurst area!

This exclusive 13 homesite community offers:
 ☐ Single-family homes from the $300’s
 ☐ 2,363 - 2,929 SF
 ☐ 3 - 4 Beds
 ☐ 2 - 3 Baths

Check out what this community has to offer YOU! Book your tour today!