Definition and Examples of a Mortgage Par Rate
A mortgage par rate is an unadjusted rate. “Think of a mortgage par rate as essentially a ‘base rate,’ with no special discounts and no markups added by a mortgage broker,” Tabitha Mazzara, director of operations at Mortgage Bank of California, told The Balance by email. You may be more familiar with the terminology “points,” something a mortgage par rate does not include, since it is the mortgage rate before any discount points or lender credits. According to Kevin Leibowitz, founder and mortgage broker at Grayton Mortgage in Brooklyn, New York, a par rate is the interest rate that equates to 100 cents on the dollar, which means it doesn’t include points. “So, if a lender is lending $100,000, for example, 2.75% may be the ‘par rate’’ for a 30-year mortgage,” Leibowitz told The Balance by email. And because there are no points, he explained, the lender will receive $100,000 on a $100,000 mortgage.
How the Mortgage Par Rate Works
The mortgage par rate is based on a variety of factors. Mazarra says it’s determined, in part, by your credit score, so you always want the best possible score before applying for a mortgage. In fact, your mortgage application could even be denied for a low credit score, or you could be required to pay a higher interest rate because you may be deemed a credit risk. Lenders will also take into consideration the type of loan you’re getting (such as a conventional or FHA loan), interest type (fixed or adjustable), home price and location, loan term or length, and the amount of your down payment. According to Leibowitz, the level of profitability can also be factored into the mortgage par rate. “So, 2.75% would be par for one lender, but 2.625% would be par to another,” he explained. The par rate can also change over time, he explained, noting that a par rate of 2.75% might be 3.00% a month later. And there is also a time component, he added. “For example: 2.750% may be a 30-day (lock) par rate, 2.875% a 60-day (lock) par rate, and 3.00% a 90-day (lock) par rate.”
Do I Need a Mortgage Par Rate?
A par rate isn’t necessarily good or bad. According to Tom Parrish, retail lending director at BMO Harris Bank in Elmhurst, Illinois, it depends on what you’re trying to accomplish. “You may want to include discount points to either take advantage of a lower interest rate or lower your closing cost,” he told The Balance by email. “Discount points, or credits, are calculated by taking the mortgage loan amount times the discount points,” he explained. For example, if you had a $400,000 loan amount with -0.125 discount point credit, Parrish said that would equal a $500 closing credit. And here’s something else to keep in mind. “Because mortgage rates change daily, the mortgage interest rate may not have a zero-point option each day, but will offer a rate close to zero with either a positive or negative point option; for example, a 3% interest rate with a -0.125 discount point credit,” he explained.
How Does the Mortgage Par Rate Affect My Mortgage?
The Consumer Federal Protection Bureau provides three scenarios to explain how points adjusted to the mortgage par rate can affect the interest rate you will ultimately receive. (The examples are from a few years ago, so keep in mind that interest rates are currently much lower).
Scenario 1: You have a 5.0% interest rate with no points. Since there are no rate adjustments, it’s not hard to understand what you’re paying for, which makes it easy to compare prices.Scenario 2: You have a 4.875% rate + 0.375 points. If it’s your intention to keep the mortgage for a long time, it makes sense to pay more cash at closing. So, you pay points now to get a lower interest rate, which saves you money over time. If you pay $675 more in closing costs to get the lower rate, you’ll pay $14 less in monthly payments for the duration of the loan.Scenario 3: You have a 5.125% rate – 0.375 points. You may not be able to pay more cash upfront and would rather pay a larger mortgage payment. So, you agree to a higher rate and the lender puts the $675 toward your closing costs. As a result, you’ll pay $14 more in monthly payments for the duration of the loan.
As you’ve seen from the examples above, the mortgage par rate can be adjusted. “If the borrower wants a lower rate—no problem—but the lender will charge the borrower to do so (paying points),” Leibowitz says. On the other hand, if you need to pay less cash upfront, Leibowitz said the lender will pay you (also known as a lender’s credit) to take a higher rate. “The credit provided can be a sizable offset to the costs of the mortgage and/or the home purchase.” Ultimately, Leibowitz said it boils down to paying now or paying later.
