In the mortgage world, the “par rate” is the mortgage rate a borrower qualifies for assuming there is no interest rate manipulation of any kind.
This means no discount points should be paid by the borrower to get a below market rate.
And there should not be a lender credit OR lender-paid compensation, as either would push the interest rate above the true market price.
The par rate, otherwise known as the base rate, is also determined by a borrower’s particular loan scenario.
As such, a high-risk borrower will have a higher par rate than a low-risk borrower because of said adjustments.
Let’s look at an example of a par mortgage rate:
– 6.5% = -1.00
– 6.25% = -0.50
– 6% = 0.00 (par rate)
– 5.75% = 0.50
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 (represented as 0.00).
This means the borrower isn’t getting a closing cost credit for obtaining that specific interest rate, nor does the borrower have to pay anything (discount points) to receive it.
Pretty straightforward, right? But wait, there’s more!
We Need to Consider Pricing Adjustments Too
- Before we get to the par rate on your home loan
- We have to tally up any risk-based price adjustments that apply
- These account for certain risk factors that might be present in your loan scenario
- They apply to credit score, occupancy, loan type, transaction type, LTV, and so on
Mortgage lenders apply all types of risk-based adjustments to home loans to ensure the price reflects the risk of default.
This would make your total “adjustments to fee” 0.50%. That figure needs to be incorporated into the base rate to determine the par rate.
How to Calculate the Par Rate
You need to factor in price adjustments to figure out your actual, or adjusted par rate. In the example above, total adjustments of 0.50% would result in a rate of 6.25%.
Simply put, the par rate is the difference of the adjustments to fee of 0.50% and the price of -0.50, which equals zero, or par.
Now if your loan had no pricing adjustments, your par rate would be 6%, as explained above.
And if you had no adjustments, but wanted the lower rate of 5.75%, you would have to pay 0.50% in discount points.
If the loan amount was $500,000, you’d owe $2,500 at closing for that lower-than-par rate.
Conversely, imagine if you didn’t want to pay closing costs out-of-pocket. You could elect to take a higher-than-par rate of 6.5% and get a 1% credit.
Using our same $500,000 loan amount, this would result in a $5,000 credit. That 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 price 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
A borrower may not know that their particular loan scenario carries few, if any adjustments. And that it will allow them to obtain a low par rate.
For example, a borrower purchasing a primary home with excellent credit and a huge down payment should receive the best pricing.
But if you don’t realize this, an unscrupulous broker and lender may tell you that your deal is trickier than it appears.
So be sure to review the mortgage adjustments section of this site to see what lenders usually hit borrowers for.
You can also check out the LLPAs from Fannie Mae. Or simply ask the bank or broker what adjustments apply to your loan.
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 above par.
Par Rate Key Points
- A mortgage rate with no lender credits or costs (discount points)
- Or baked-in lender compensation (to avoid out-of-pocket costs)
- That also factors in any pricing adjustments (e.g. credit score, LTV, property type, etc.)
- This provides the true market rate for your particular home loan
- You can then decide to accept a below-par or above-par rate based on associated costs
- And perhaps more easily shop your loan with other lenders knowing this base rate