A Complete Guide To Par Rates
Scott Steinberg4-minute read
May 25, 2021
A par rate is the special interest rate that any given financial lender will charge you as the borrower for access to a specific loan product.
It’s a crucial piece of information to have for most borrowers, as it essentially describes the lending interest rate for a loan that you can obtain without any lender credit or discount points applied. (In other words, how much interest on your home mortgage that you can expect to pay.)
A par rate will influence your monthly mortgage payment, how much you can expect to lay out in annual housing expenses and more. Simply read on to find out more about how it works in practice.
What Is A Par Rate?
Put simply, a par rate is the interest rate on a mortgage loan that you can expect to receive based on the type of loan that you’ll be signing up for and your credit history – unadjusted by any factors that would pay down (aka lower) your interest rate.
To obtain it, you do not have to secure any credit from the lender or pay any discount points (one-time fees paid to the lender to lower your interest rate and monthly payment) as a borrower.
Before applying for a home mortgage, it’s important to establish a good credit score and history, as these factors will influence the type of mortgage that you’ll be able to apply for and the par rate that you’ll be eligible to receive.
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How Do Mortgage Par Rates Work?
Before allowing you to borrow any sums, mortgage underwriters (financial pros who evaluate your finances and assess how much of a risk you may be to a lender) must first provide approval. In effect, a mortgage underwriter will be the final arbiter of whether or not you’ll receive a home loan and will work with you to gather necessary paperwork and insights to make this determination.
Several common factors that underwriters take into account when weighing prospective applications include, but are not limited to:
- Credit Score
- Credit History
- Debt-To-Income Ratio
The higher your credit score (and harder you work at improving your credit score) prior to applying for a loan, the more favorable a par rate you will generally receive.
Note that as part of any mortgage loan agreement, you must agree to a par rate.
Also be aware: As a general rule, FHA, VA and conventional loans come with more favorable par rates than loans made on second homes and investment properties. Loans for single-family homes may also come with a lower par rate attached than those keyed to apartments, condominiums and other multifamily residences. Shorter-term loans also typically tend to come with lower interest rates attached than longer-term loan products.
How Do Mortgage Lenders Use Par Rates?
Mortgage lenders use par rates as a measure of any given borrower’s risk. They also utilize them in the servicing of the loan and determination of monthly mortgage payments. Par rates can also be used as a tool to buy and sell mortgages in the secondary market or to other banks, as mortgage providers often sell or hand off the servicing of loan agreements to other providers.
How Can Par Rates Be Adjusted?
The par rate that you are provided by a mortgage underwriter can also be adjusted to a lower rate. This can be done through the application of premiums and discounts. To find out more about possible options for adjusting and lowering your par rate, you can discuss the possibilities of rate adjustment with your loan officer.
Note that par rates that have been adjusted are referred to as the “adjusted par rate,” and final details can be found outlined in your home’s closing statements.
As above, discount points (aka mortgage points) are one-time fees that you can pay to your lender in order to lower your mortgage par rate.
By way of example, on a $150,000 home loan, you could save $21.85 per month (or $7,866 over the course of a 30-year loan) by paying 1.25 points ($1,875 in additional closing costs) on your loan.
Alternately, paying 2 points on the same loan would result in additional costs at closing of $3,000 – but produce a $66.41 decrease in your monthly mortgage – adding up to a whopping $23,907.60 savings over the lifetime of a 30-year loan.
Financial lenders may also agree to pay part of your closing costs – fees paid at the time of closing upon the purchase of your property – in exchange for lender credits. This allows you to close upon a property and complete a real estate sale without having to pay as much in closing costs at the time the property is sold.
However, in the event that you have opted to accept lender credits, note that you will be required to accept and receive a slightly higher interest rate.
How Can I Estimate My Par Rate?
Only mortgage underwriters can accurately set par rates. Nonetheless, borrowers can estimate their rate using their lender’s standard market rates by loan type. As you go about researching your potential par interest rate, be sure to research multiple loan types and lenders to determine which makes the most sense for you.
Borrowers can also calculate how a change in interest rate will affect their monthly mortgage payment using our mortgage calculator.
The Bottom Line: Consider Your Par Rate Options
To summarize, a par rate is the interest rate on your mortgage that your chosen financial provider will charge you for the servicing of your loan without the application of discount points or lender credits.
Per prior sections, your par rate can also be adjusted up or down by taking out lender credits or applying discount points, respectively. As you go about deciding which mortgage lender to choose, be sure to consider par rate practices.
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