A mortgage loan's par rate is the underwriter-determined interest rate that is applied to all loans of that type. A lender's "par rate" for a mortgage loan is the interest rate it will charge the borrower before factoring in any discounts for the borrower's good credit or the lender's own financial strength. When the mortgage par rate has been changed by the lender, it is said to be at an adjusted par rate.

What Is a Mortgage Par Rate

When a borrower applies for a mortgage loan, the underwriter will determine the interest rate (called the "par rate") based on the applicant's credit history and other factors.

The underwriter looks at the borrower's debt to income (DTI) ratio and credit score among other things to establish the mortgage par rate.

The interest rate that applies after a lender makes a change to the mortgage's par value is known as the adjusted par value.

Discount points are a one-time fee paid to the lender by the borrower that reduces the mortgage's par rate.

How the Mortgage Par Rate Works

The underwriters in charge of determining mortgage par rates do so by using the applicant's credit history as input. As a marketing tool or point of reference for borrowers researching loans, many financial institutions publish tables of standard market rates broken down by loan product type.

Once a loan has been disbursed, the par rates are recorded and analyzed as part of the lender's risk management processes. The secondary market and inter bank transactions often involve the use of par rates when mortgages are bought and sold between lenders. The par rate is used for internal calculations involving such things as servicing rights and other loan-specific metrics.

Par Rate Underwriting

In some cases, a lender will provide a reference point schedule so that borrowers can get a rough idea of what their loan rate might be for a given product. However, until a loan application is submitted, the par rate cannot be determined. After receiving a loan application, an underwriter will evaluate both the applicant's credit history and the current benchmark interest rates for that specific loan product. The underwriter will calculate a fixed interest rate, or par interest rate, that the borrower will be expected to pay if the loan is funded.

Different types of loans have different factors from which the par rate is calculated. The debt-to-income (DTI) ratio and credit score of the borrower are two factors that are taken into account when determining the interest rate for a standard personal loan. In addition to the debt-to-income ratio and credit score, the housing expense ratio is also taken into consideration when deciding whether or not to grant a borrower a secured loan, such as a mortgage.

How to Make Adjustments in Par Rate Mortgage

Borrowers are quoted a par rate by lenders, which may be higher or lower depending on any applicable premiums or discounts. Any premiums or discounts that may be applicable to a borrower's situation should be discussed with their loan officer. Different criteria can be used to calculate discounts. Borrowers can defer some of the up-front fees of a loan by paying a premium.

Discounted Points

Borrowers pay a one-time fee to the lender in the form of discount points (also called mortgage points) in exchange for a lower interest rate on their mortgage. Essentially, discount points can be thought of as prepaid interest. A borrower can lower their interest rate by up to 0.25 percentage points for every discount point they pay for. Lenders typically allow borrowers to buy between one and three discount points, which can result in an interest rate reduction of 0.25 percentage points to 0.75 percentage points.

Each point represents one percent of the mortgage principal. One point, for instance, on a mortgage loan of $200,000 would amount to $2,000. In exchange for a lower interest rate, the borrower would pay the lender $2,000.

Credits Granted by Lenders

If the lender agrees to pay some of the borrower's closing costs, the mortgage's par rate will also change. Borrowers are responsible for paying all fees associated with the closing process that are in addition to the purchase price of the property. Loan origination fees, appraisal fees, title insurance premiums, property taxes, and the cost to record the deed are all examples of closing costs.

Closing costs are typically paid in part by the lender in a lender credit scenario, reducing the amount of cash the borrower must bring to closing. The borrower accepts a greater interest rate on the mortgage in return for the lender's concessions.

The use of a mortgage broker as an intermediary can incur an extra fee. After any adjustments have been made, the new rate that the borrower agrees to pay is known as the "adjusted par rate." The lending agreement and any related settlement statements will contain full disclosure of the par rate and any adjustments to the par rate.