If you’re shopping for a home loan, you’re probably familiar with the concept of mortgage rates. You probably also know that even a small change to that number can change the amount you pay in interest over the life of a loan by tens of thousands of dollars.
But you may not have heard of the par rate. The par rate is important because it’s the opening interest rate a lender offers on a mortgage loan – but it may not be the mortgage interest rate you end up paying.
Read on to learn what a mortgage par rate is, how it’s determined and how you can use it to get a better rate.
What Is a Mortgage Par Rate?
The par rate is the initial interest rate a lender offers a borrower. It’s not necessarily the interest rate you will pay on your mortgage.
It’s usually based on market conditions and the borrower’s credit score. The par rate may be adjustable or fixed, and it’s typically the first interest rate you’re eligible for after applying for a home loan.
Your final rate may be higher or lower than the par rate. It will depend on:
- The number of discount points you purchase
- The closing costs and fees charged by your lender
- Changing market conditions
How does a lender determine your par rate?
Your final mortgage interest rate will be influenced by your par rate. It may be higher or lower pending your lender’s review of your finances and credit profile. They’ll look at different factors, including your:
- Credit score and history
- Income
- Employment history
- Loan type
- Down payment amount
What can you do when you know your par rate?
The par rate isn’t necessarily the best mortgage interest rate you can get, but it’s a good baseline. Once you know your par rate, you can negotiate and explore different options with the lender, such as buying points or taking advantage of lender credits to pay less upfront.
The par rate is also a helpful way to compare rates between different loan products and services. For instance, if one lender offers you a par rate of 4.5% for a 30-year fixed-rate mortgage and another offers a par rate of 4.75% for a loan with the same terms and conditions, you may want to ask the second lender why their rate is different from the first lender.
This gives you the information you need to find out why one lender might offer a different rate, what steps you can take to lower your par rate or leverage to negotiate a better offer.
If your par rate is higher than you expected or higher than the rate other lenders are offering you, you may want to consider negotiating with a lender for a more favorable rate.
How are mortgage par rates used by lenders?
Lenders will often use the par rate as a way to offer deals and discounts to borrowers. When they make an initial offer to a borrower, they present the par rate. If the lender is especially interested in earning a particular borrower’s business, they may offer a lower par rate.
Lenders can also make adjustments to the par rate if a borrower meets certain conditions like making a larger down payment or settling outstanding debts to improve their debt-to-income (DTI) ratio.
The par rate is also used by lenders to calculate the starting interest rate on both fixed-rate and adjustable-rate mortgages (ARMs). The starting interest rate on an ARM is based on the par rate plus or minus a margin determined by the lender that typically ranges between 2.5% and 3.5%.
How To Adjust Your Par Rate To Your Advantage
Once you know what your par rate is, you’ll probably want to look for ways to either lower it or see if you can benefit from raising it. After all, the lower your mortgage interest, the less you’ll pay in interest over time, but there may be advantages to paying more in interest.
Discount points
One approach to adjusting the par rate is to buy discount points. Discount points are a one-time fee paid at closing in exchange for a lower interest rate.
One discount point generally equals 1% of the loan amount and will reduce your interest rate by 0.25%. For instance, if you are offered a par rate of 5.25% on a $200,000 loan, you can buy 1 point for $2,000 (1% of the loan amount), which would lower your rate by 0.25%, putting your final rate at a round 5.00%
The more discount points you buy, the lower your interest rate – and your monthly payment – will be. But, discount points aren’t right for everyone. You should consider purchasing discount points if you plan on staying in your home for a long time. If you plan on selling your home or refinancing within a few years, you likely won’t recoup the cost of the discount points.
Lender credits
Another way to adjust your par rate is to take advantage of lender credits. With lender credits, the lender agrees to cover all or part of the borrower’s closing costs in exchange for the borrower paying a slightly higher interest rate on the loan.
For example, let’s say you’re taking out a $200,000, 30-year fixed-rate mortgage with a 4% interest rate, and your closing costs are $3,000. You think it over and decide you don’t want lender credits. You pay the $3,000 upfront and your monthly mortgage payment will cost you $954.83
But let’s say life offers you a do-over and this time you decide that you need that $3,000 now rather than later. You could choose to accept lender credits in exchange for a 4.5% interest rate. In this scenario, your monthly mortgage payment will cost you $1,013.37. You’d save the $3,000 upfront, but you’d pay $702.48 more in interest every year.
After the first 4 1/2 years of paying your mortgage, the extra interest will exceed your initial savings, but you may decide that it’s worth it to pay less now and more later.
Your credit score is among the biggest determiners of your interest rate. Borrowers with scores in the mid-700s may command the best rates.[1]
What Is an Example of a Par Rate?
We’ve gone over how par rates work, so let’s drive the concept home with an example.
Suppose you’re ready to buy your first home and plan to take out a $200,000 loan to purchase a two-bedroom condo. You’ve been saving like a mad person for years and have $50,000 in the bank. You agree to put down a 20% down payment of $40,000 and finance $160,000, leaving $10,000 in reserve for closing costs.
After doing some research, you learn the par rate for a 30-year fixed-rate mortgage is hovering at 4.25%. When you apply for a loan, your lender offers you a par rate of 4.85%. (Remember, this is your par rate, no discounts or credits have been added yet.)
Being a savvy borrower, you wonder why your par rate is higher than the going market rate. You’re not thrilled about 4.85% because it means you’ll pay an extra $720 a year in interest, so you ask your lender about ways to lower it.
Your lender explains your rate is higher because your credit score doesn’t qualify you for a lower par rate. However, since you’re making a 20% down payment, the lender offers to lower your interest rate to 4.35% if you buy 2 discount points for $4,000
Now, you know that you will probably spend no more than 5 years in your home. When you do the math, you realize it will take longer than 5 years for the savings in interest to equal the amount you paid for the 2 discount points.
In the end, you let your lender know you’ll stick with the 4.85% interest rate. It’s not what you’d hoped for, but you’re making an informed decision that works better with your goals.
How Can I Estimate My Par Rate?
Your mortgage par rate can be estimated by taking several factors into account, including your credit score, employment history and the size of your down payment.
The easiest way to estimate your par rate is to use a mortgage calculator. A mortgage broker or lender can offer a more accurate number than an online calculator because they’ll have access to more detailed information about your finances.
When it comes to mortgages, the par rate is just the starting point. A money-savvy borrower understands that the par rate isn’t set in stone – it’s the basis for negotiations.