Par rate
With regard to mortgage, the par rate is the interest rate a borrower qualifies for with a given bank or lender with no add-ons or adjustments to fee.
In other words, the borrower would receive the par interest rate if there was no yield spread premium charged by the broker or lender, and no adjustments to rate or fee.
Par rate, otherwise known as the base rate is determined by the borrower’s particular loan scenario, which includes adjusments for things such as loan amount, credit score, property type, loan-to-value, and so on.
The par rate for a high-risk borrower will be much higher than that of a low-risk borrower because of adjustments, but a broker or lender can still manipulate a low-risk borrower’s rate by taking an excessive yield spread premium.
Let’s look at an example:
6.5% -1.00
6.25% -.50
6% 0.00
5.75% .50
In the example above, we see interest rates with corresponding fees or rebates. 6% is the par rate assuming there are no adjustments because it falls on zero. However, you may have an adjustment for loan amount of say .25%, and an additional credit score adjustment of .25%, so your total adjustments to fee would be .50%.
You would need to factor in those adjustments to figure out your actual, or adjusted par rate, so in the preceding example, total adjustments of .50% would make the par rate 6.25%.
The par rate is the difference of the adjustments to fee of .50% and the price of -.50, which equals zero, or par.
In many situations borrowers may not realize that their particular loan scenario carries few adjustments, and will ultimately allow them to qualify at a low par rate. Watch out for corrupt brokers who tell you that your deal is trickier than it seems. Make sure you review the mortgage adjustments section of this site to see what lenders hit borrowers for, and always ask a bank or broker what your adjustments to fee are, and how much yield-spread premium they are charging.
