Last updated on July 29, 2026

Prime Rate

The prime rate is a benchmark interest rate that large banks charge their most creditworthy commercial customers, widely used as an index for adjustable-rate mortgages, home equity lines, and business loans that float at prime plus a margin.

Exam context

Prime rate is bank benchmark for best customers. ARM may use prime plus margin. Index plus margin equals fully indexed rate. Discount rate is Fed lending to banks, not consumer prime.

Index and margin

Loan documents state an index (often Wall Street Journal prime) plus a margin such as prime minus 0.25% or prime plus 1%. When prime rises, fully indexed rates increase at the next adjustment date subject to periodic and lifetime caps on ARMs. Fixed-rate loans ignore prime changes after closing.

Market context

Prime historically moves with the federal funds rate but is set by individual banks. Agents explaining HELOC or business credit lines should note that payment shock follows rate hikes. Qualification may use a higher stressed rate even when the start rate is low.

Examples

  • HELOC adjustment

    A homeowner's equity line at prime plus 0% reprices monthly. When prime rises from 8% to 8.5%, the contract rate increases 50 basis points on the next billing cycle.

  • Commercial line

    A developer's construction line documents interest at prime plus 1.5% with a floor of 6%, so payments track bank prime unless the floor binds.

Keep studying

Practice prime rate questionsEnroll in pre-licensing

Related terms

Related resources

Sources

Sources with the date each row was checked
FactAuthorityURLVerified
Federal Reserve: consumer credit termsBoard of Governors of the Federal Reserve Systemhttps://www.federalreserve.gov/

Facts on this page were last verified . Next scheduled review .