The prime rate is a term to denote banking interest rates. In the United States, the prime interest rate isn’t the actual interest rate a customer can expect when getting a loan because banks tend to adjust their rates above or below the going prime rate. At the beginning of 2012, the US prime rate was 3.25%.
When obtaining a mortgage, it’s important to recognize the current prime rate to better help you to compare loan products. 15-year fixed mortgage rates tend to be right around or just above the national prime rate. 30-year fixed mortgages, however, tend to come with higher rates due to the sheer length of the loan term. When the prime rate is 3.25%, you can generally expect a 15-year FRM to be at a 3.25% interest rate, but a 30-year FRM will fall around the 4.0% mark.
This may not mean much to potential homebuyers who are simply looking for a long-term loan to save them money on monthly payments, but taking on a 15-year mortgage will save you tons of money in interest over the length of the loan, even though you end up paying more per month.
So, who is in charge of setting the prime rate? That would be the Federal Reserve (otherwise known as the Fed). The Fed has the ability to increase or decrease interest rates as it sees fit, although the Federal Reserve Act specifically states that the entity should consider maximum employment, moderate long-term interest rates and stable prices.
This is a tricky business because decreasing the prime rate can stimulate economic growth. The lower the interest rates, the more likely people are to jump on the home buying bandwagon. Increasing interest rates helps control inflation, thereby promoting a more sustainable economy. The idea is to find that prime interest rate that will suit economic growth while keeping prices stable. It’s a thin line to walk.
2011 saw strong inflationary pressures building, but they have receded with the start of 2012. As of now, there is a low inflation outlook and the United States is projected to have moderate economic growth in the New Year.
In keeping with monetary policy, which is the process of controlling the country’s supply of money, economic growth and stability is key. The goals involved in monetary policy include stabilizing prices to make products easy to purchase and improving unemployment percentages. The lower the unemployment rate, the more stuff people buy, which is always good for the economy.
When it comes down to it, monetary policy rests on how the economy’s interest rates and total supply of money relate to one another. The Fed controls the availability and supply of money and setting the prime interest rate is more mathematically involved than one might think.
There’s not much to be said for the current economic outlook except that things seem to be stabilizing. Unemployment claims dropped by 50,000 by the middle of January, but much of that was probably due to seasonal, temporary employment. Even so, it’s the best news the country has received regarding the unemployment rate since April 2008. With a modest amount of hiring going on and the labor market slowly beginning to recover, there will be a lot to watch for in the early months of 2012.
These are all things to take into consideration if you are in the market to buy a home. Interest rates are at an all-time low and the prime rate is forecasted to stay at 3.25%, at least until August of 2012, so now may be the perfect time to start house hunting.
Before shopping around for that dream home, use a mortgage calculator to determine how much your monthly payment will be, based on the current interest rates. It’s always best to know exactly where you stand financially before seeking out a realtor.
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