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. It 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.

Key Takeaways

• A mortgage par rate is the standard interest rate calculated by an underwriter based on a borrower’s credit application for a specific mortgage loan.
• The underwriter reviews factors such as the borrower’s debt-to-income (DTI) ratio and credit score to determine the mortgage par rate.
• If the lender adjusts the mortgage par rate, the new interest rate is called the adjusted par rate.
• A borrower can lower the mortgage par rate by buying discount points, which are a one-time fee.

How a Mortgage Par Rate Works

Mortgage par rates are generated by underwriters based on a borrower’s credit application. Lenders may generate a schedule of standard market rates by loan product type as a marketing tool or reference point for borrowers.

Lenders record and analyze the par rates on loans as part of their risk management procedures. Par rates are also used for buying and selling mortgages or internal evaluations of a loan, including servicing rights.

Par Rate Underwriting

Borrowers may have an estimate of what their loan rate might be 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. The underwriter analyzes the borrower’s credit profile and reference point rates to generate a par interest rate that the borrower must agree to pay in the loan agreement.

Par rates are based on factors such as the borrower’s debt-to-income (DTI) ratio and credit score for personal loans. Mortgage loans also consider the borrower’s housing expense ratio.

Par Rate Adjustments

Lenders provide borrowers with a par rate quote which may be adjusted due to premiums or discounts. Borrowers should discuss these with their loan officer.

Discount Points

Discount points, also known as mortgage points, are a one-time fee the borrower pays the lender to reduce the interest rate on the mortgage. Each point purchased can decrease the interest rate by up to 0.25%. Most lenders allow one to three discount points, meaning the interest rate can be reduced by 0.25% to 0.75%

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.

Lender Credits

An adjustment occurs if the lender agrees to pay part of the borrower’s closing costs. 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, a premium may be required to compensate the broker. The final rate that a borrower agrees to pay after adjustments is the adjusted par rate. All details of the par rate and adjustments will be disclosed in the lending agreement and closing settlement statements.