Prime Rate
The interest rate commercial banks charge their most creditworthy customers, set at roughly 3 percentage points above the federal funds rate. A common index for bank lines of credit and some bridge and construction loans.
The prime rate is the benchmark banks use to price loans for their strongest borrowers. In practice it tracks the Federal Reserve's federal funds rate, sitting about 3 percentage points (300 basis points) above it. When the Fed raises or cuts, the prime rate moves in lockstep within a day or two. The Wall Street Journal Prime Rate (the consensus among large banks) is the version most loan documents reference.
Why it matters in investor lending
While SOFR dominates term and DSCR lending, the prime rate is the go-to index for bank lines of credit, business credit lines investors use for down payments, some bridge loans, and many construction draws. If you have a new construction loan or a revolving line, there's a good chance it's priced as Prime + a margin (or Prime minus a discount for very strong borrowers).
A worked example
An investor has a line of credit at Prime + 1.00%.
Fed funds rate 4.50% → Prime ≈ 7.50%
Line rate = 7.50% + 1.00% = 8.50%
Fed cuts 0.25% → Prime ≈ 7.25%
Line rate = 7.25% + 1.00% = 8.25%
The rate dropped automatically the next statement cycle after the Fed cut — no refinance needed.
Prime vs. SOFR
Both move with Fed policy, but they're not identical. Prime adjusts in discrete steps tied to FOMC decisions, while SOFR floats daily on market funding conditions. Prime is simpler and more familiar; SOFR is the standard for institutional and securitized debt. The right comparison is always index + margin against your alternatives.
How it's used in investor lending
If any of your financing is prime-based, your rate is directly exposed to Fed decisions. Investors who rely on prime-indexed lines for short-term capital should plan for rate moves at each Fed meeting. For long-term holds, a fixed-rate DSCR loan removes prime exposure entirely. Watch how prime interacts with your reserves and cash flow when rates are rising.
This is general information, not financial advice.
Frequently asked questions
How is the prime rate set?
It's set by commercial banks, but it closely tracks the Federal Reserve's federal funds rate — typically about 3 percentage points higher. When the Fed changes the funds rate, banks adjust prime within a day or two. The Wall Street Journal Prime Rate is the widely cited benchmark.
Is prime or SOFR better for an investor loan?
Neither is universally better — it depends on the product and the margin. Prime is common on bank lines of credit and adjusts in steps with Fed decisions. SOFR is the standard for term and DSCR loans and floats daily. Always compare the full rate (index plus margin), not the index alone.
Why did my line of credit rate change without a refinance?
Because it's likely indexed to prime. When the Fed raises or cuts rates, the prime rate moves and your line's rate resets automatically at the next cycle. That's normal for variable, prime-based lines — no new loan is needed for the rate to change.