What is the prime rate and how does it affect mortgages?

When you shop for a mortgage, the interest rate affects your monthly payment and the total cost over the life of the loan. Understanding how rates are set can help you make informed borrowing decisions.

A key tool used by lenders to determine mortgage interest rates is the prime rate, a benchmark rate that serves as a foundation for many consumer loan products. Because the prime rate fluctuates based on larger economic conditions, monitoring its movement can help you understand rate trends.

Prime rate definition

The prime rate is a benchmark rate used by banks to determine the interest rates of their loans, including mortgages . For example, a lender may offer mortgages to well-qualified borrowers at the prime rate. Those with slightly lower credit scores or who are otherwise not ideal borrowers may pay a higher rate, such as the prime rate plus 1% or the prime rate plus 2%.

Each bank sets its own prime rate, so there isn’t a single national benchmark. However, many major banks set their prime rates based at least in part on the federal funds rate , a benchmark rate set by the Federal Reserve. The Federal Reserve sets this benchmark based on the state of the economy, hoping to adjust the cost of borrowing to ensure consistent economic growth and a stable level of inflation.

The Fed also publishes the prime rate posted by the majority of the nation’s twenty-five largest banks.

Today’s prime mortgage rates

Generally, the prime rate is higher than the federal funds rate because the federal funds rate represents the safest return a bank can earn by lending its money to other banks. Riskier loans to consumers, such as mortgages, must come at a higher interest rate.

The difference between the prime rate and the federal funds rate hovers around 3%. For example, on December 4 th , 2025, the effective federal funds rate was 3.89% and the prime rate set by the majority of the twenty-five largest banks in the US was 7%. This data is published by many sources, including the Federal Reserve and the Wall Street Journal .

Keep in mind that banks use more than just the federal funds rate to set their own rates. Other market factors, such as the demand for mortgages, anticipated changes to the federal funds rate, borrower creditworthiness, and more, all impact the rates a lender charges.

With the Fed likely to cut rates in the near future due to a weakening economy, odds are high that the prime rate is likely to fall, as it has in recent years with the reduction of the federal funds rate.

Historical prime rates

Prime and historical mortgage rates move based on many factors, including the overall economy, inflation, changing oil prices , and changes to the federal funds rate. The federal funds rate also changes based on the Fed’s observations of the economy.

For example, during periods of high inflation, such as those seen in the past few years, the Fed may raise rates to try to reduce spending and tamp down on inflation. This caused the federal funds rate to rise from near 0% to a high of more than 5.25% between 2021 and 2024. Over that same period, the prime rate rose from 3.25% to 8.5%.

This table shows changes to the prime rate over the past few years.

What determines the prime rate?

The prime rate a bank sets depends on many different financial factors. The federal funds rate is one major influence on prime rates, but banks may look at other factors, such as the overall health of the economy, demand for loans, and more.

Prime rate vs. fed funds vs. LIBOR vs. SOFR

The prime rate is just one benchmark rate used by lenders to determine how much to charge for a mortgage or other loans. Many other benchmark rates, such as the federal funds rate, which is used to determine the cost of overnight loans to other banks, exist.

Two other important benchmarks are the London Interbank Offered Rate (LIBOR) and the Secured Overnight Finance Rate (SOFR) .

The LIBOR was previously used to determine the interest rate of adjustable-rate loans. It was determined by finding the average of interest rate estimates sent by banks asked to estimate how much they would be charged to borrow money overnight from other banks. LIBOR was phased out in 2023 in favor of SOFR.

SOFR took the place of LIBOR due to worries that LIBOR could be manipulated. The U.S. Congress established SOFR as the default replacement rate for loans that previously used LIBOR. SOFR is determined using the actual costs of overnight loans as calculated by the New York Federal Reserve, rather than estimates submitted by banks.

It’s important to note the prime rate may be used for mortgage products like adjustable-rate mortgages (ARM) or home equity lines of credit (HELOCs) , but it’s usually not the main benchmark for most fixed-rate mortgages . Usually fixed-rate mortgages are benchmarked against the yield of the 10-year Treasury note . Generally, the prime rate is more often the benchmark for credit cards, auto loans, and small business loans.

FAQ

Understanding the prime rate and how it changes over time can help you time your mortgage application, so keep these things in mind.

Is there a limit on how high the prime rate can go?

There is no limit on how high the prime rate can go. It is closely tied to the federal funds rate, and there is no theoretical limit on how high the Fed can raise its benchmark rate. Being able to raise interest rates is one way the Fed can fight inflation, so it could, in theory, raise rates as high as necessary to reduce inflation.

For example, in the 1980s, the federal funds rate rose to more than 19%, but nothing would have stopped it from exceeding 20% or more if the Fed deemed it necessary.

How often does the prime rate change?

Prime rate changes are not scheduled; they are responsive to the prevailing economic conditions. Typically, major changes in the economy and adjustments to the federal funds rate can lead to changes in the prime rate.

Can the prime rate affect your mortgage payments?

Adjustments to the prime rate can affect your mortgage. For example, if you have an adjustable-rate mortgage, your loan’s rate may be quoted as something like “prime rate + 0.5%.” That means that if the prime rate rises or falls, your mortgage rate may change during its next adjustment period.

What’s not impacted by prime rate changes?

Fixed-rate loans are not impacted by prime rate changes. For example, if you have a certificate of deposit or a fixed-rate mortgage, the rate will not change, no matter how much the prime rate rises or falls.

The bottom line

The prime rate is a benchmark rate that describes the interest rate that the most-qualified borrowers can get for loans such as mortgages. When borrowing money, you want your loan’s rate to be as close to the prime rate as possible. To accomplish this, make sure you have strong credit and good finances, including a low debt-to-income ratio and stable income, to make yourself as attractive a borrower as possible.

If you’re ready to start the homebuying process, you can apply for a mortgage to with Visto Mortgage ® today to see what you may qualify for.

TJ Porter has ten years of experience as a personal finance writer covering investing, banking, credit, and more.

TJ’s interest in personal finance began as he looked for ways to stretch his own dollars through deals or reward points. In all of his writing, TJ aims to provide easy to understand and actionable content that can help readers make financial choices that work for them.

When he’s not writing about finance, TJ enjoys games (of the video and board variety), cooking and reading.

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