Vail Chamber & Business Association: What’s the prime rate and why is it important?
Special to the Daily
You may have heard that recently the Federal Reserve lowered the Wall Street Journal prime rate to 5%, which is the second decrease to this index in 2019. This news generated a lot of buzz about rates across the nation, and with that buzz comes some misinformation that mortgage rates and the prime rate are closely connected.
What is the prime rate and why is it important? The prime rate is a short-term rate index and is commonly used for car loans, credit cards, lines of credit and some short-term adjustable-rate mortgages. At a high level, the prime rate is set based on the feel and projected direction of the economy and is tied to the Federal Reserve funds rate. As the funds rate moves up, the prime rate goes with it and vice versa. You’ll typically see the prime rate priced between 2 and 4 percent above the Fed funds rate.
While the prime rate is a good index to pay attention to as a consumer it is not the best index for fixed mortgage rates. Mortgage rates can be indirectly influenced by the prime rate but simply put, fixed mortgage rates are not directly tied to the prime rate. This is because fixed mortgage rates are priced based on longer-term yields and indexes.
U.S. Treasury bonds, notes and bills are a better indicator of fixed-rate mortgage prices than the prime rate because they are long-term investments. There are other factors that play into mortgage pricing like demand and the real estate market, but if you are looking for indexes to better track the trend of fixed mortgage rates, look to the 10-year treasury and 30-year bond markets or call your local banker.
Stay involved and stay informed. If you are not already receiving the Vail Chamber and Business Association’s weekly newsletter, email us at email@example.com to start receiving it. If you are interested in finding out more about the Vail Chamber and Business Association and what we have to offer to businesses in and that do business in Vail, call 970-477-0075 or email firstname.lastname@example.org.
Matt Gruesbeck is the assistant vice president of First Bank – Eagle County and a member of the Vail Chamber & Business Association board of directors.