Mortgage Par Rate: What it is, How it Works

What Is a Mortgage Par Rate?

A mortgage par rate is the standard interest rate calculated by an underwriter and assigned to a borrower for a specific lending product. A mortgage par rate is the interest rate a lender will charge a borrower without adjustments for lender credits or discount points. If the lender adjusts the mortgage par rate, it is then referred to as the adjusted par rate.

How a Mortgage Par Rate Works

Mortgage par rates are generated by underwriters based on a borrower’s credit application. Oftentimes, lenders will generate a schedule of standard market rates by loan product type as a marketing tool or reference point for a borrower researching a loan.

Once a loan is issued, lenders record and analyze the par rates on loans as part of their risk management procedures. Lenders may also use par rates for buying and selling mortgages to other banks or in the secondary market. The par rate is also a consideration for various other internal evaluations of a loan, including a loan’s servicing rights.

Par Rate Underwriting

Borrowers may have an estimate of what their loan rate might be for a specific product based on a reference point schedule generated by the lender. However, the par rate on a loan cannot be calculated until a borrower completes a loan application. Once a loan application has been submitted, the underwriter will analyze the borrower’s credit profile along with the reference point rates on the type of loan they are seeking. If approved, the underwriter will generate a par interest rate that the borrower must agree to pay in the loan agreement.

Par rates are based on various factors that differ by loan type. Most standard personal loans will consider a borrower’s debt-to-income (DTI) ratio and credit score in the par rate determination. Secured loans and specifically mortgage loans also consider a borrower’s housing expense ratio along with DTI ratio and credit score.

Par Rate Adjustments

Lenders provide borrowers with a par rate quote which may be adjusted due to premiums or discounts. Borrowers should always discuss any potential premiums or discounts that may be available with their loan officer. Discounts can be applied based on various factors. Premiums may also be applied to allow a borrower to forego some of the upfront costs associated with a loan.

Discount Points

Discount points, also known as mortgage points, are a one-time fee the borrower pays the lender in order to reduce the interest rate on the mortgage. Discount points are prepaid interest. For each discount point a borrower purchases, the interest rate on the mortgage will decrease by up to 0.25%. Most lenders will allow borrowers to purchase from one to three discount points, meaning the borrower could potentially reduce their interest rate by 0.25% to 0.75%

Typically, each point is equal to 1% of the total amount of the mortgage. On a $200,000 home loan, for example, one point is equal to $2,000. The borrower would pay the lender $2,000 in exchange for a lower interest rate. 

Lender Credits

Another adjustment to a mortgage par rate occurs if the lender agrees to pay part of the borrower's closing costs. Closing costs are those expenses above the price of the property the borrower is expected to pay in order to complete the transaction. Examples of closing costs include loan origination fees, appraisal fees, title insurance, property taxes, and deed recording fees.

In a lender credit situation, the lender pays a portion of these closing costs, reducing the amount of cash the borrower needs to bring to the closing table. In exchange for lender credits, the borrower agrees to pay a higher interest rate on the mortgage.

If a borrower works with an intermediary mortgage broker, then a premium may be required to compensate the broker. The final rate that a borrower agrees to pay after adjustments is called the adjusted par rate. All details of the par rate and par rate adjustments will be disclosed in the lending agreement and outlined in any closing settlement statements.