How PRIME RATE affects my mortgage? - Posted by Ed Garcia

Posted by Ed Copp on October 07, 2001 at 15:07:47:

for pointing out the fact that every cut in the prime rate is little more than a free gift to the poor, poverty stricken bankers.

Since the prime is now at a 40 year low, it would seem like the rates might get lowered on some of the in place financing, like credit cards and such. I refuse to hold my breath.

If I remember correctly the F.H.A home loan rate was 5.25% 40 years ago. It seems to me like anything above that right now is massive profit.

How PRIME RATE affects my mortgage? - Posted by Ed Garcia

Posted by Ed Garcia on October 07, 2001 at 12:15:50:

How PRIME RATE affects my mortgage?

It doesn’t.

All week I’ve been having my customers tell me, that they have heard that the PRIME RATE has dropped. There is no direct connection between prime rate and home loan mortgage rates.

The PIME RATE, is supposedly the lowest rate that banks lend to their best customers.

It’s has been lowered 9 times in 10 months by Alan Greenspan the chairman of the Federal Reserve. It can take at least 6 months for these rate reductions to have any effect on the national economy.

Home loan interest rates are generally tied to the 10-year U.S. Treasury note interest rate.
They used to be tied to the 30-year U.S. Treasury bond interest rate, but recently vary few 30-year Treasury bonds have been issued.

The theory is that the lenders who want to lend money long term can either buy 10-year Treasury notes, or get a higher yield by investing in 30-year home loans, which usually pay off in less then 10-years.

I hope this clears the air for those of you who thought that Prime Rate affects your interest rate when obtaining a mortgage.

Ed Garcia

The PRIME RATE is SHORT term and - Posted by David Krulac

Posted by David Krulac on October 07, 2001 at 19:14:36:

mortgage rates are LONG term. There is no coorelation.
I did see 5.25% fixed for 15 years with 3 points, today! That’s not bad!
David Krulac

Point of clarification… - Posted by Andrew

Posted by Andrew on October 07, 2001 at 17:15:02:


The Fed (Greenspan and his pals) sets the Fed Funds or overnight rate and the discount rate. Both of these relate to loans between banking institutions and the Fed.

The Fed does not set the Prime Rate; there is no single Prime Rate. The “Prime Rate” is really just the average rate that major banks are charging their best customers for short-term or adjustable loans. Usually, the Prime Rate is a few points higher than Fed Funds rate that we always hear about on the news.

You are correct that there is no direct connection between the Prime Rate and long-term, fixed mortgage rates.

Just wanted to make that a bit clearer.


Re: How PRIME RATE affects my mortgage? - Posted by carl

Posted by carl on October 07, 2001 at 15:10:52:

Doesn’t the prime rate affect the cost of money in general throughout the economy? Why would the yield of treasury bills be unaffected by the wide-spread effect of a lower prime rate, even with the lag time?