Prime Rate?

Question

Ok Several questions...is any loan that is lower than the prime rate mean that the loan is going to be a negative amortization type loan? Next question is the prime rate the best guide to consider when figuring out if interest rates on home loans are going up or down?

Answer 1

Prime rate is a benchmark rate at which large banks lend to prime corporate borrowers. It is used in mortgages for sheer convenience as a wildely publicized reference. If you qualify for a rate below prime, it basically means that the bank perceives the combination of you and the property you are financing as an investment opportunity with lower risk compared to an unsecured loan to a large corporate borrower; hence, the lower interest rate.

Whether or not your loan is negative amortization or not has very little to do with interest rate. Interest rate and amortization schedule are different parameters, sort of like how tall you are and how much you weigh; somewhat related, but widely varying. Other things being equal, a negative amortization loan would carry a slightly higher interest rate compared to a conventional mortgage due to negative amortization loan's higher duration.

Is the prime rate the best guide to consider when figuring out if interest rates on home loans are going up or down? No. Federal Reserve publishes conventional mortgage rates weekly (on both Thursdays and Fridays), monthly, and annually:

http://www.federalreserve.gov/releases/h15/data.htm

Answer 2

Question 1: No, a negative amortizing loan means that your payments are going to be less than the required P&I to service the loan.

For example, say you want a 100,000 mortgage 30 year mortgage and your interest rate is fixed at 6%. Assuming you don't escrow your taxes and insurance, the principal and interest (P&I) required to pay down your loan is $599.56 per month. If your payment were $500 per month this would be a negative amortizing loan.

Question 2: No, the FOMC sets the Fed Funds Rate (Currently at 5.25%). The Fed Funds Rate is the SHORT TERM rate that banks can borrow at. The Prime rate is 300 bps over Fed Funds (currently 8.25%). Again, these are short term so unless your loan is floating and tied to the PRIME rate, PRIME is no indicator of what your rate or payment will be doing. Go to finance.yahoo.com and you can see mortgage rates in your area. Hope this helps.