Prime Interest Rate FAQs
Below are a few frequently asked questions about prime rate.
Is there a limit on how high the prime rate can go?
To put it simply, no. There’s no limit on how high the prime interest rate can rise. If the Federal Reserve deems it necessary to raise the federal funds rate – indirectly raising the prime rate, it can.
How often does the prime rate change?
While the prime rate can adjust at any time, it typically only sees major adjustments when a benchmark, like the federal funds rate, changes. Severe economic downturns, such as the global recession during COVID-19, are often a major predictor of when the prime rate will drastically change. While the prime rate can technically change at any time, it’s not uncommon for years to pass without a significant adjustment.
Can the prime rate affect your mortgage payments?
Whether the prime rate affects your mortgage payments will depend on the mortgage you have. If you have a fixed-rate mortgage, it won’t be directly affected by the prime rate because you locked in the interest rate for the life of the loan. If you have a variable interest rate loan, like an adjustable-rate mortgage (ARM), your monthly payments will likely go up as the prime rate increases or adjust downwards as the prime rate drops.
A drastic drop in the prime rate may be a reason to explore refinancing your mortgage. Refinancing may lower your interest rate and your monthly mortgage payment.
What’s not impacted by prime rate changes?
The prime doesn’t directly affect all financial products. Fixed-rate loans, such as student loans and fixed-rate mortgages, aren’t directly impacted by changes in the prime rate. And the interest rates on savings accounts aren’t directly influenced by the prime rate either.
