Mortgage par rates: What they are, how they work

A par rate is the special mortgage 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, it’s how much interest on your home mortgage 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, the total loan amount you pay for borrowing and more. But what exactly is the purpose of a par rate?

What is a mortgage par rate?

A mortgage par rate is the standard interest rate calculated by an underwriter and given to a borrower for a specific lending purpose. The mortgage par rate is the interest rate before any expenses, like origination fees, are included.

Put simply, it is the rate on a mortgage loan that you can expect to receive based on the type of loan you’ll be signing up for and your credit history – unadjusted by any factors that would lower your interest rate like lender credits or discount points.

To obtain your par rate, you don’t have to pay any discount points (the one-time fees paid to the lender to lower your interest rate and monthly payment) as a borrower.

How do mortgage par rates work?

Before allowing you to borrow any sums, mortgage underwriters (the financial pros who evaluate your finances and assess how much risk you may be to a lender) must first provide approval. In effect, a mortgage underwriter will be the final judge of whether you’ll receive a home loan and will work with you to gather the necessary paperwork and insights to determine your par rate.

Several common factors that underwriters take into account when weighing prospective applications include, but are not limited to:

• Income
• Credit score
• Credit history
• Debt-to-income ratio (DTI)
• Employment

The higher your credit score (and the harder you work at improving your credit score) before applying for a loan, the more favorable your par rate will generally be.

Note that as part of any mortgage loan agreement, you must agree to a par rate.

It’s essential to be aware that as a general rule, Federal Housing Administration (FHA), Department of Veterans Affairs (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 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 the 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.

Mortgage par rate underwriting

After a borrower applies for a loan, the mortgage underwriter will analyze their credit profile along with any existing reference rates for the type of loan they applied for. If the underwriter approves their application, they will create an interest rate – a par rate – that the borrower is required to pay, notated in the loan agreement.

This final par rate is a combination of factors, one of the most important being loan type.

Standard personal loans typically use credit score and debt-to-income (DTI) ratio as primary determinants of what the par rate should be. Mortgage loans, on the other hand, factor in the borrower’s housing expense ratio on top of credit score and DTI ratio. Other previously mentioned factors include income, credit history and employment status.

How can par rates be adjusted?

The par rate that a mortgage underwriter provides you can also be adjusted to a lower rate through premiums and discounts leading to an aptly named “adjusted” par rate.

Discount points

As we’ve mentioned above, discount points (or mortgage points) are one-time fees that you can pay to your lender 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.

Alternatively, 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 payment– adding up to a whopping $23,907.60 savings over the lifetime of a 30-year loan.

Lender credits

Financial lenders may also agree to pay part of your closing costs – fees paid at the time of closing upon purchasing your property – in exchange for lender credits. This allows you to close on 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’ve opted to accept lender credits, you’ll be required to accept and receive a slightly higher interest rate.

When discussing lender credits and low closing costs, it’s important to mention that special purpose credit programs (SPCPs) are also available to borrowers from underserved populations. This type of program aims to make it easier for applicants to qualify for a mortgage loan.

Rocket Mortgage® has a program called Purchase Plus that helps qualified borrowers in certain areas by offering a base credit of $5,000.¹ We will also contribute an additional lender credit of 1% of your home’s purchase price – up to $2,500. If you’re qualified, this program could end up reducing your down payment substantially.

How can I estimate my par rate?

Only mortgage underwriters can accurately set par rates. Nonetheless, borrowers can attempt to determine their mortgage rate using their lender’s standard market rates by loan type. As you go about researching your potential par interest rate, be sure to look into 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 finance provider will charge you for servicing your loan without the application of discount points or lender credits.

Ready to continue on your home buying journey? Start the mortgage process today.

¹ Client will receive a closing cost grant up to the amount of $7,500 on their Closing Disclosure. Offer is valid for only for first-time home purchasers with primary residence properties in specific census tracks located in Atlanta-Sandy Springs-Roswell, Georgia; Baltimore-Columbia-Towson, Maryland; Brownsville-Harlingen, Texas; Chicago-Naperville-Elgin, Illinois, Indiana and Wisconsin; Cleveland-Elyria, Ohio; Dallas-Fort Worth-Arlington, Texas; Detroit-Warren-Dearborn, Michigan; Houston-The Woodlands-Sugar Land, Texas; McAllen-Edinburg-Mission, Texas, Memphis, Tennessee, Missouri and Arkansas; Miami-Fort Lauderdale-Pompano Beach, Florida; New York-New York-Jersey City, New York, New Jersey and Pennsylvania; Oklahoma City, Oklahoma; Orlando-Kissimmee-Sanford, Florida; Philadelphia-Camden-Wilmington, Pennsylvania, New Jersey, Delaware and Maryland; Phoenix-Mesa-Chandler, Arizona; Riverside-San Bernardino-Ontario, California; San Antonio-New Braunfels, Texas; St. Louis, Missouri and Illinois; Tampa-St. Petersburg-Clearwater, Florida; and Washington-Arlington-Alexandria, Washington D.C., Virginia, Maryland and West Virginia. Offer valid from November 17, 2023. Offer is nontransferable. Offer cannot be applied retroactively to closed loans. Offer may not be redeemed for cash, and no change will be given if the discount amount exceeds costs otherwise due. Rocket Mortgage reserves the right to cancel this offer at any time. Other discounts may be ineligible with this offer.