What is a par rate on a mortgage?

What does "par rate" mean?

Every lender has a range of rate and cost combinations for the same loan. The par rate is a zero-discount-point, zero-lender-credit pricing baseline: you pay no discount points, and the lender gives you no credit.

Shawn Way, a licensed loan originator at West Capital Lending, describes it this way in his video on discount points: "par rate meaning you're not paying any extra interest upfront."

Par is a useful starting point because it lets you compare lenders on equal footing. The CFPB makes a similar point: a no-points, no-credits quote is the easiest one to compare across offers. Your par rate depends on your loan type, credit, down payment and the market on the day you lock.

What are discount points?

Discount points are prepaid interest. You pay them at closing in exchange for a lower interest rate. The CFPB states that one point equals one percent of the loan amount.

• On a $300,000 loan, one point costs $3,000.
• On a $500,000 loan, one point costs $5,000.
• Points can be partial, such as 0.5 or 1.25 points.

How much one point lowers your rate is not fixed. It varies by lender, loan type and market conditions on the day you lock. Ask each lender for the exact rate at each level of points.

Points appear on page 2, Section A, of your Loan Estimate and Closing Disclosure. Check that section when you compare offers, because a low advertised rate may include points.

What are lender credits?

Lender credits work in reverse. You accept a rate above par, and the lender gives you money toward your closing costs. The CFPB describes it as paying a higher interest rate to get a lender credit toward some or all of your closing costs.

Lender credits appear as a negative number on page 2, Section J, of your Loan Estimate and Closing Disclosure. They can reduce the cash you need at closing, but you pay more interest every month for as long as you keep the loan. Some people call these rebates or negative points.

How do you calculate the break-even point?

The break-even point tells you how long it takes for monthly savings to repay the points you bought.

Break-even (months) = cost of points / monthly payment savings

If you sell, refinance or pay off the loan before that month, buying points cost you money. If you keep the loan longer, you come out ahead. The same math works for lender credits in reverse: the credit is worth it if you leave the loan before the extra interest adds up to more than the credit.

The CFPB suggests asking a loan officer to compare total costs over a few timeframes: the shortest, the longest and the most likely time you expect to keep the loan.

How should you decide between par, points and credits?

In his videos, Shawn asks borrowers two questions before they buy points: how long do you plan to own the home, and what do you think will happen to rates? On the first, he is direct: "If you're not planning on owning this home for very long then no, absolutely do not buy any points."

Other factors to weigh:

• Cash at closing. Points use cash you might otherwise keep as reserves or put toward the down payment.
• Refinance plans. If you refinance later, the lower rate you paid for ends early, which shortens the time you have to recover the cost.
• Total closing costs. Lender credits can cover costs you would otherwise pay out of pocket.

No one can promise where rates will go. The break-even math, run on your own numbers, is the most reliable guide.

What can lender credits pay for?

The CFPB describes lender credits as going toward some or all of your closing costs. Those can include lender fees, title and appraisal charges, and prepaid items. In his video on points, Shawn explains that credits from an above-par rate can be used to cover other costs, including taxes and insurance on a purchase.

How much credit you can receive, and what it can cover, depends on the lender and the loan program. Ask your loan officer to show the credit amount at each rate on your Loan Estimate, so you can see exactly how far above par you would need to go.

Remember the tradeoff: the credit is a one-time benefit, while the higher rate lasts for as long as you keep the loan.

Are points the same as origination fees?

No. Discount points buy a lower rate. Origination fees pay the lender or broker for making the loan and do not lower your rate. Both show up in Section A of your Loan Estimate, so read the line labels carefully.

When comparing offers, line up loans with the same rate or the same points. Otherwise one quote can look cheaper only because it shifts cost into points or out of them.