What Is A Par Rate?
A Par rate is the baseline rate for a mortgage without any discount or origination charges or loan level adjustments for your loan to value or your credit score or history. The most important thing you should know is knowing what your credit score is and trying to raise it as much as possible.
Mortgage lenders use par rates to assess the level of borrower’s risk. They can also be used in the buying and selling of mortgages in the secondary markets. Par rates can then be adjusted based on paying discount points. For example, if your par rate on a 30-year fixed is 6.75% and you decide to pay one discount point on your $200,000 mortgage ($2000), then your interest rate would be reduced typically by a .25%. Understand this is just a rule of thumb and not always the case meaning the point you pay could reduce your interest by .0125% or up to .0375%. This all depends on the pricing for the day.
In our example above the principal and interest payment for the $200,000 mortgage at 6.75% would be $1297. In paying one point or $2000 you could receive an interest rate of 6.5% which would reduce your payment to $1264 with a $33 reduction. It would take you roughly 5 years to recoup the cost of the points you paid at closing with the lower monthly payment.
Make sure you understand what your par rate is and whether you should pay points by working with a trusted mortgage professional such as the Home Loans Advisors at Hall Financial.