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The prime rate is the commercial interest rate that lenders charge to their best and most credit worthy customers.
This implies that it is the lowest possible rate. At least that what it technically means.
It’s interesting that lenders who advertise prime rates for their credit facilities don’t mention anywhere that it’s the lowest rate.
In reality, borrowers are frequently quoted interest rates specifically below prime like “prime minus half”.
However, because it is still generally accepted as it’s traditional definition, it can be used as a benchmark or measuring stick to compare mortgage rates against the lending economy in general.
It must be noted that various types of home loan interest structures are also below prime rate.
For example adjustable rate mortgages often consist of interest rates with an index component plus a margin like LIBOR plus 1%. And because of a low LIBOR, the interest rates of the loan during the initial years are below prime. And who is to say it will not remain the same after those years?
This lower interest rate will also become the basis when lenders determine the monthly mortgage payment for calculating the approved loan amount.
A lower interest rate results in a lower payment requirement, which in turn results in a high approved loan amount when the income of the borrower is added to the equation.
Teaser rate loans are also likely to be below prime rates.
So the next time you get offered a home loan that is of prime rate, do make a check and compare it with other offers to ensure that you are not being taken for a ride.