A loan with a par rate, often referred to as the base rate, is an interest rate at which a mortgage lender won't pay a yield spread premium require, discount points for a mortgage or pay lender compensation. The par rate is determined by the borrower's individual loan scenario, which includes various factors such as the loan amount, property value, mortgage price adjustments, credit score and property type. A rate can be at par, above par or below par.
Points
Think of par as ground zero. It's the interest rate without any points, or money you pay to lower the rate at closing. For example, an interest rate at par may be 4 percent plus zero points. The lender may offer you the interest rate below par at 3.5 percent plus two points. Each point is equal to 1 percent of the loan amount. If you want to pay the two percent of the loan amount at closing, you'll get the 3.5 percent interest rate. If you opt for an interest rate above par, such as 4.5 minus 2 points, you can take the 4.5 interest and receive 2 percent of the loan amount back as credit at your closing.
Yield Spread Premium
Yield spread premium is the rebate the lender pays the broker or loan officer for an interest rate that's above the market rate. In some cases, the broker can charge the yield spread premium fee and give the borrower a higher rate to make a larger commission off the loan. Sometimes the yield spread premium is used as a way of helping the borrower avoid closing costs. The fee, which is in the form of interest, is tacked onto the loan and paid monthly so the borrower doesn't actually need any money out of pocket at closing. If you're buying down your rate with points, there shouldn't be a yield spread premium, but you'll still need to pay commission to the broker. Review your HUD-1 Settlement Statement or Good Faith Estimate for the estimated costs you can expect to pay. Some alternate terms for yield spread premium include:
- par-plus pricing
- rate participate fee
- service release fee
Identifying Your Par Rate
Your par rate and another borrower's par rate can vary significantly. There isn't a market par rate or a current par rate. When you apply for a loan, your lender can show you a series of interest rates and options. The par rate is the interest rate without any points you'll need to pay or points due to you. Keep in mind, interest rates can change daily.