The Fed made an interest rate increase this week of 75 basis points, but several lending experts I’ve spoken to believe the mortgage market should not see negative implications since the increase has probably been priced into today's rates. According to Mark Cohen of Cohen Financial, “I think the mid-June highs that sent some loan products over 6% represent the peak for 2022 and barring any major events, we won't see a significant change in mortgage rates for the remainder of the year.” Case in point: the 30-year fixed mortgage rate dropped last week after the news about the prime rate increase.
What is the definition of “prime rate” and how does it impact current mortgage rates and loan products? If you’re shopping for a new home or interested in making a real estate investment, you’ve no doubt heard the term thrown around. The prime rate is the bare minimum rate a bank would charge if you took out a loan. Because most banks charge more than the prime rate for consumer credit, you’ll likely pay a marked-up version of the prime rate. The size of the markup depends on the amount of risk you display. The higher your risk of default, the higher the rate a lender will charge. The type of borrowing also matters. The rate for a mortgage would be different from one for a personal loan or credit card. The prime rate affects all loans lenders give, including business credit. Business clients usually pose a lower risk of default, so they stand a higher chance of getting the prime rate or close to it.
Mortgages are sold on the bond market. The attractive part of bonds for investors is that they offer a guaranteed rate of return. However, there are two downsides: First, if inflation increases at a higher rate than the rate of return you’re getting on that bond, you will lose money. Second, they don’t offer the yield that comes with higher-risk investments like stocks.
In general, if people are feeling confident about the economy, they tend to invest more in stocks and less in bonds. If they see a downturn in the future, just the opposite is true. So, both the market and your finances impact the fixed rate for a mortgage. however, the prime rate has nothing to do with it.
The prime rate is the rate that banks give their most creditworthy clients, the least risky they have. Nearly every other consumer interest rate a bank has is based on this. However, mortgages are a special focus because these rates have much more to do with movements in the bond market.
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