What is the Prime Rate?
The prime rate is the interest rate that commercial banks charge their most creditworthy customers. It serves as a benchmark for many types of consumer and business loans, including HELOCs, adjustable-rate mortgages, credit cards, and some commercial real estate loans.
How the prime rate works
The prime rate is typically the federal funds rate plus 3%. When the Federal Reserve raises or lowers the federal funds rate, banks adjust prime accordingly. If the federal funds rate is 5.25%, prime is typically 8.25%. Loans pegged to prime are expressed as "prime plus" a margin: a HELOC at prime + 1% would carry a 9.25% rate.
Impact on real estate
The prime rate directly affects several financing products. HELOCs (often used by investors for down payments or rehab costs) adjust with prime. Some commercial real estate loans are prime-based. Credit card rates, which affect investors' personal finances and DTI, are directly tied to prime.
Indirectly, prime signals the overall cost-of-money environment. When prime is high, all borrowing costs are elevated, which cools demand and can compress property values. When prime is low, cheap capital fuels demand and supports higher prices.
For wholesalers
Rising prime rates increase the cost of capital for your buyers, reducing what they will pay. Hard money rates become even more expensive, holding costs increase, and MAO decreases. Your assignment fee may need to shrink. Conversely, falling prime rates make deals easier to pencil and expand the buyer pool.