Discount Rate
The discount rate is the interest rate charged by the Federal Reserve to commercial banks for short-term loans. It serves as a benchmark that influences all other interest rates in the economy, including mortgage rates.
Example
“When the Federal Reserve raised the discount rate by 0.25%, commercial banks immediately increased their prime lending rates.”
Memory Tip
The Fed's discount rate sets the 'discount' that banks get when borrowing money - think of it as the wholesale price for money.
Why It Matters
Changes in the discount rate directly impact mortgage interest rates and loan availability, affecting affordability for homebuyers and refinancing opportunities for existing homeowners.
Common Misconception
The discount rate is not the same as mortgage rates that consumers receive, but rather the foundational rate that influences how lenders price their loans.
In Practice
When the Federal Reserve raises the discount rate by 0.5%, mortgage lenders typically increase their rates within days, making home loans more expensive for new buyers.
Etymology
Originally called the 'discount rate' because banks would 'discount' (reduce the face value of) promissory notes when lending money to other banks in the 1800s.
Common Misspellings
Compare today's mortgage rates
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