What Is A Par Rate And How Does It Affect My Mortgage?

Most people know that an interest rate helps determine how much a borrower will pay to get a mortgage to buy a home. They also know that having a low interest rate means paying less for the money they’re borrowing. Pretty simple stuff, right?

Well, not so much. The general idea of interest and loans can be relatively easy to understand, but the layers of complexity can build up pretty quickly when you dig into the details. For example, you may have heard the term “par rate” and were left a little puzzled.

Here, we will explain what par rate is and how it affects your mortgage so you can better prepare for the home buying process.

What Is A Mortgage Par Rate?

The par rate is the initial interest rate assigned to your home loan. It doesn’t include a Yield Spread Premium (YSP), discount points or lender credits. To put it another way, a par rate is what you’ll receive based on the type of mortgage you’re getting and your credit history, without any additional adjustments for things like “buying down” your rate.

A number of factors (more on these below) affect a borrower’s par rate and it’s important to note that a par rate can be adjusted, so it’s not set in stone. Want to crunch the numbers? Use this mortgage calculator to estimate your own rate for a home loan.

How Is A Mortgage Par Rate Determined?

The underwriting process is how a lender determines a mortgage’s par rate based on the borrower’s individual financial situation. It serves as a diagnostic of your financial health intended to ensure you can afford to pay back the loan you’re about to receive.

An underwriter will use your loan application to determine the mortgage par rate by looking at your income, employment history, credit score, debt-to-income ratio, loan type and down payment amount.

Income

Lenders verify your income to make sure you can pay your monthly mortgage payments. You‘ll need to provide them with several documents including your W-2s from the last 2 years, your two most recent pay stubs, and your two most recent bank statements. If you’re self-employed, you will need to show them several different documents including your most recent tax returns from the last few years.

Employment History

A steady employment history is equally important as proof of income. Lenders prefer borrowers that have worked in the same field or role for a few years over borrowers who have just changed jobs or are unemployed.

Why? Statistically, people who have been in a job for a longer period are less likely to have a loss of income or job status. This means they are more likely to continue bringing in the income needed to pay their mortgage each month. 

Credit Score

Your credit score is a big factor that affects your mortgage par rate when applying for a home loan. The factors that go into determining your credit score are:

• Payment history
• Credit utilization
• Length of credit history
• New credit
• Credit mix

A credit score is made up of all the aforementioned different parts, but a simpler way to think about it is that it determines how reliable you are with handling debt and paying back your loans.

Debt-To-Income Ratio

Your debt-to-income ratio, or DTI, is a percentage that tells lenders how much money you spend on debts versus how much money you have coming in each month. You can calculate your DTI by adding up your monthly minimum debt payments and dividing the total by your monthly pretax income.

Don’t like the results of that calculation? You can lower your DTI by paying off debt if it’s above your lender’s threshold.

Loan Type

The type of mortgage you get will generally affect your mortgage par rate. VA loans and FHA loans, for example, are known for having lower interest rates than conventional mortgages. It’s also important to know that fixed-rate loans may have higher interest rates than adjustable-rate mortgages (ARMs), especially during an ARM’s introductory period. Talk to your lender about how par rates will change depending on which loan type you select so you can make an informed decision. 

Down Payment Amount

The bigger your down payment on the loan, the less money the lender has to lend you. That means less risk for them and, thus, a lower par rate. This also means that your lender may require a higher par rate if you use a small down payment amount. You’ll also be required to pay private mortgage insurance (PMI) if your down payment is less than 20% on a conventional loan.

Can You Adjust Your Mortgage Par Rate?

A par rate that has been adjusted is called an “adjusted par rate.” You can consider the following options to adjust your par rate. Also be sure to keep in mind that par rate doesn’t include fees or the mortgage broker’s markup.

Mortgage Points

Mortgage points, sometimes referred to as discount points, are a form of prepaid interest that is tax deductible. Essentially, you pay more upfront to bring down the par rate so you pay less interest over the course of the loan.

Lender Credits

Think of lender credits as the opposite of mortgage points. Your interest rate will be higher over the course of the loan but you won’t pay as much up front because your lender gives you money towards your closing costs.

How Does A Par Rate Affect A Mortgage?

To better illustrate how par rates affect a home buyer’s mortgage loan, let’s walk through two example scenarios.

Example Scenario 1

Let’s say you are buying some real estate and your loan officer tells you that you qualify for a specific interest rate without discount points included. This initial interest rate would be your mortgage par rate.

Example Scenario 2

Now let’s say you decide to buy discount points to lower your monthly payment and rate for the same loan term used in the example above. Look at the table below to see how this would affect your adjusted par rate.  

The numbers used in this chart are based on a fixed rate loan in which each point (costing 1% of the loan amount) lowers the rate by 1/4, or 0.25%.

The Bottom Line

A mortgage par rate is the first interest rate you will hear from a loan officer when you get quoted for a mortgage loan. It’s an important number to know, as it is the starting point for your interest rate and will determine your cost to borrow money to purchase your home.

Your mortgage par rate can change though, based on the factors and strategies outlined in this article. Knowing how the mortgage par rate is calculated and how you can change it puts you in the best position to get the best terms on your mortgage. Ready to get a par rate quote? Start by filling out an application for approval today!