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 (YSP) 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.
Since YSP has been outlawed, there should not be a lender credit, as it would also bump the interest rate above the market price in similar fashion.
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.
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 mortgage interest rates with corresponding fees or rebates.
For our hypothetical borrower, a rate of 6% is the par rate, assuming there are no pricing adjustments, because it has zero associated cost, and no rebate.
This means the borrower isn’t getting a credit for obtaining that specific interest rate, nor does the borrower have to pay anything (discount points) to obtain.
We Need to Consider Your Pricing Adjustments Too
- Before we get to the par rate on your home loan
- We have to tally up any risk-based pricing adjustments
- These can move the par rate up or down
- Depending on certain risk factors that might be present in your loan scenario
Mortgage lenders apply all types of risk-based adjustments to the home loans they originate to ensure the price reflects the risk.
For example, your particular loan scenario may have a mortgage 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%.
Simply put, the par rate is the difference of the adjustments to fee of .50% and the price of -.50, which equals zero, or par.
Now if your loan had no pricing adjustments, your par rate would be 6%, but if you wanted the lower rate of 5.75%, you would have to pay .50% in discount points.
If the loan amount was $500,000, you’d have to pay $2,500 at closing for that lower-than-par rate.
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.
Using our same $500,000 loan amount, this would result in a $5,000 credit, which could be used to offset any lender fees and third-party costs associated with the home loan. This is how a no cost refinance works.
Get to Know Your Home Loan to Land a Low Rate
- The key to obtaining a low rate is knowing how risky your home loan is
- This means researching what pricing adjustments typically apply to your scenario
- Asking the loan officer or broker what adjustments your loan is subject to
- Then shopping your rate with other banks and mortgage lenders
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 appears.
And be sure to review the mortgage adjustments section of this site to see what lenders usually hit borrowers for, and always ask the bank or broker what your adjustments to fee are, and how much 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 they may need to charge an out-of-pocket loan origination fee or receive lender-paid compensation, the latter of which can also bump up your rate.