The prime rate is an interest rate which banks charge their highest credit customers for short term loans. It is called prime because the high credit profile of a “prime” borrower presents very little risk to the lender, bank or investor. While the prime rate is not centrally set by the government, banks do tend to set the prime rates at equal levels between themselves and they do not change the prime rate often. However, the Wall Street Journal does publish a prime rate which averages the current prime rates of 75% of the largest 30 banks in the country.

As an ARM index, the Wall Street Journal’s prime rate index serves primarily as the base rate or index for the broad class of home equity loan and home equity line of credit second mortgage products, so you may have a mortgage tied to the prime rate and not even know it. Prime rate index adjustable rate mortgages are generally relatively expensive by comparison to fixed rate mortgages, and many borrowers will seek to refinance a prime rate indexed home equity loan or HELOC (Home Equity Line of Credit) to convert to a fixed rate prior to the end of the adjustable rate mortgages introductory period, because rates and payments may jump dramatically upon these loans’ initial adjustment.