Par Rate

With regard to mortgage lending, the “par rate” is the interest rate a borrower will qualify for with a given bank or mortgage lender assuming there is no interest rate manipulation.

In other words, the borrower would receive the par interest rate if there was no yield spread premium taken by the broker or lender in exchange for an above par rate, and no discount points paid by the borrower to get a below par rate.

Additionally, there should not be a lender credit, as it would also bump the interest rate above the market price.

The par rate, otherwise known as the base rate, is also determined by a borrower’s particular loan scenario, which includes mortgage pricing adjustments for things such as loan amount, credit score, property type, loan-to-value ratio, and so on.

Keep in mind that the par rate for a high-risk borrower will always be much higher than that of a low-risk borrower because of adjustments, but a mortgage broker or lender can still manipulate a low-risk borrower’s mortgage rate by taking an excessive amount of yield spread premium.

Let’s look at an example of par rate:

6.5% -1.00
6.25% -.50
6% 0.00 (par rate)
5.75% .50

In the example above, we see a list of interest rates with corresponding fees or rebates. A rate of 6% is the par rate, assuming there are no adjustments, because it falls directly on zero.

This means the loan originator isn’t making any extra money for offering that specific rate, and the borrower doesn’t have to pay anything (discount points) to obtain it.

However, your particular loan scenario may have a pricing 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 these adjustments to figure out your actual, or adjusted par rate, so in the preceding example, total adjustments of .50% would bump the par rate up to 6.25%.

Put simply, the par rate is the difference of the adjustments to fee of .50% and the price of -.50, which equals zero, or par.

If you had no pricing adjustments, putting you at a par rate of 6%, but wanted the lower rate of 5.75%, you would have to pay .50% in discount points.

In the same scenario, if you didn’t want to pay some or all closing costs out-of-pocket, you could elect to take a higher-than-par rate of say 6.5%, and get a 1% credit.

In many situations, borrowers may not realize that their particular loan scenario carries few, if any adjustments, which will ultimately allow them to qualify at a low par rate.

Watch out for unscrupulous brokers and lenders who tell you that your deal is trickier than it seems.

And be sure to review the mortgage adjustments section of this site to see what lenders hit borrowers for, and always ask the bank or broker what your adjustments to fee are, and how much yield spread premium they are charging.

Otherwise you could end up with a higher mortgage rate than you deserve, which will cost you big if you hold onto the mortgage for years to come.

Keep in mind that the broker/lender still needs to make money for processing and funding your loan, so if they offer you a par rate, they’ll need to charge a loan origination fee.

Tip: What mortgage rate should I expect to receive?


8 Comments

  1. Hal June 22, 2013 at 6:18 pm -

    You should add that the par rate can vary by lender. I was told my base rate was 3% with one lender, and 3.5% with another, for the same exact loan. So people need to shop around.

  2. Tina November 3, 2013 at 12:39 am -

    How do you know if you’re getting the par rate vs. an inflated rate?

  3. Colin Robertson November 3, 2013 at 11:59 am -

    As long as there isn’t a lender credit or lender-paid compensation, the rate should be at par. But that means you’ll need to pay out-of-pocket for loan origination and other lender fees. Nothing is completely free, though at least you’ll be getting a market rate.

  4. Shan January 3, 2017 at 9:10 am -

    Par rate does not vary by lender, it should be the same for a given set of parameters like zip code, credit score, loan amount, and term.

  5. ron sikkema April 25, 2017 at 3:40 pm -

    Hi Colin,
    I have been quoted a PAR rate of 5,625 for a loan of 150.000 on a 450.000 commercial rental property and 1% orgination fee.
    I put down 300.000 myself
    Does this sound right to you

  6. Colin Robertson May 1, 2017 at 11:09 am -

    Ron,

    I don’t know commercial property rates…my focus is on residential mortgages. Best way to know might be to obtain other quotes and see where it falls. Good luck.

  7. Yvette May 23, 2017 at 8:58 pm -

    I am trying to figure out if I was ‘dupped” … The originator did not give me details or options on my mortgage – I was given a 4% loan, charged a 1% Origination Fee ($1377.50) and given $516.56 in lender credit. I did see on the paperwork (.38) in pts. I am now (unfortunately a little too late, I know) trying to figure out how bad was I taken …. I had dealt with this originator in years past so I trusted him….he was at a different bank.
    I had a credit score of 809, and no debt and money in the bank. I did get a Conventional Mtg and paid only 5% down because it does need a good bit of things done to it and I didn’t want to pay alot of money down and pay alot for repairs as well. The PMI wasn’t very much ($45 per mo) and after I do upgrades, I will be able to get that dropped after a couple of years at most. My financials were great – loan closed in 3 weeks.
    The originator did not go over what the 1% was for, why I got a lender credit or why I saw .38 pts on paperwork – Nor would he give me a breakdown of costs when I repeatedly asked.
    Today, I called another Bank location and just asked for their fees and they immediately said we charge 2 ways, either you can pay 1% Origination and your rate is 3.75% or you can chose to not pay an origination fee and your rate is 3.875%. My question is…. did I get dupped by paying the 1% since I had great credit ? I locked on April 10th and my rate I received was 4% which from what I can gather was the going rate. I can find anything or I haven’t received anything or gotten anything where my rate was paid down by the 1% ($1377.50) less the $516.56 Lender Credit I received – which is a net paid of $860.94. That is what I am trying to find out – what did I pay $860.94 for ?

    Also, the lender failed to tell me they also charge a $550 Underwriting Fee and & $270 Doc Fee – When I questioned these when I saw on the Disclosures, he said “The forms are very confusing and the origination fees are in the wrong places, trust me, I will save you money” but that is a whole other section of deception.

    I would like to know what I paid the $860.94 for, if you have any insight ?

    Thanks !

  8. Colin Robertson May 24, 2017 at 2:01 pm -

    Yvette,

    As you said, that 1% is their origination charge (commission) for funding your loan. Sometimes it’s paid directly by the borrower at closing, other times it’s paid via a higher interest rate (and thus not out of pocket, just over time). It’s possible those other fees you mentioned are part of the overall origination fee.

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