Mortgage par rates: What are they and how do they work?

A mortgage par rate is a baseline interest rate for a home loan. It can vary by the type of loan you get, whether you get a fixed or variable interest rate, and other factors.

From there, your par rate can also be adjusted by mortgage points and lender credits (resulting in an “adjusted” par rate). Read on to learn more about mortgage par rates and how they work.

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.

For example, an underwriter may recommend a par rate of 6.00%, but if you buy down the rate down by two points, it would be 5.5%.

How do mortgage par rates work?

Before letting you borrow money, 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.

Many common factors that underwriters consider when weighing prospective applications include, but are not limited to:

• Income
• Credit score
• Credit history
• Debt-to-income ratio (DTI)
• Housing expense ratio
• 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 than those tied to apartments, condominiums, and other multifamily residences. Shorter-term loans also typically come with lower interest rates than longer-term loan products do.

How do mortgage lenders use par rates?

Mortgage lenders use par rates as a measure of a borrower’s risk. They also use them to service the loan and to determine the 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 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 rate.

For example, on a $150,000 home loan with a 6.00% par rate, you could save $29.91 per month (or $10,769 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 $47.64 decrease in your monthly mortgage payment – adding up to a whopping $17,151 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, if you’ve opted to accept lender credits, you’ll 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 try to determine their mortgage rate using their lender’s standard market rates by loan type. As you research your potential par interest rate, look into multiple loan types and lenders to determine which makes the most sense for you.

You can also calculate how a change in interest rate will affect their monthly mortgage payment using our mortgage calculator.

The bottom line: You can often lower your par rate

A mortgage par rate is your baseline interest rate before any adjustments for discount points and lender credits. By adjusting your interest rate with discount points and lender credits, you can secure a lower “adjusted” par rate to help you save on total interest costs.

Ready to find out what par rate you qualify for? Start your loan application with Rocket Mortgage today and get one step closer to owning your dream home.