The Prime Lending Rate - sometimes just called “Prime”  - is the interest rate that banks charge each other for overnight loans. Some consumer rates - like ARMs - are set in relation to Prime.

In the US, Prime is affected by the Federal Reserve lending rate to banks; historically, Prime is about 3 percent above the Fed rate.

The video shows  an example.

• The Federal Reserve loans to Bank A at 1%
• Bank A loans to Bank B at 4%
• Both banks - A & B - will recalculate variable-rate loans like ARMs on that 4% Prime figure.

ARM rates are frequently defined as “% above Prime” - that gap is usually called the “margin” or “spread.” Just remember those 3 layers in Prime: Federal Reserve Bank A Bank B And finally, YOUR rate.