Mortgage lenders have different “point-values” associated with their interest rates, where there’s different costs associated. If you pay the lender more upfront for a lower interest rate, that’s called “buying points” or “buying down your interest rate.” It’s essentially a way to get a lower interest rate for the life of the loan, which can be really valuable if the overall interest rates are low and you expect to hang on to the house for a long time (at least 5 or 8 years).
On the other side, if the lender pays you money at closing—or gives you credits toward closing costs for a higher interest rate—this is referred to as “lender credits.”
Most lenders try to hide the difference between points and credits (or hide the price you have to pay, or that you might receive, when you get points or credits), but we try to be as upfront as possible. You can see the two with + pts (points) or – cr (credit) on our rates page.
So, what’s the interest rate without points or credits? That’s referred to as the “par rate.”
Par Rate isn’t real!
Now – here’s the big weird thing that lenders rarely (maybe never) talk about: the “par rate” doesn’t technically exist. At least not in the way it’s talked about as a “base rate” everywhere.
Without getting into the detailed rationale around capital markets and Frannie and Freddie and all that (if reading Fed reports is your jam, let’s hang out). Just know that any loan will have thousands of different variables that factor into its interest rate and most will have associated +/- points or credits. Getting to an exact “0-point” placement on a rate is actually pretty rare.
So, why do so many lenders seem to offer a 0-point “par rate” on their websites? Well, that’s because lenders typically show the lowest “credit” rate as 0 points and pocket the cash they should be giving back to you. I’m sure it’s just easier than trying to explain the details, but it’s still kinda shady, right?
If a par rate is really a myth, does it matter?
Sorta. Let’s get into the nitty gritty on mortgage pricing:
- First off, the points and credits are all different at different lenders, so getting to the “best single rate” can be really tricky (if not impossible).
- Second, most lenders are inconsistent in who gets better or worse rates—they might be really catering to jump loans over $1M, for example. This is how they’re able to maintain a little niche of business with roughly 4,000 different competitors.
Basically, there’s no single lender that’s always the “best price” in every situation.
So, you can look at the APR as a decent apples-to-apples comparison of pricing (since it accounts for the points and fees, usually), but even that it’s perfect.
What lender has the best prices?
It’s our mission to be the lowest-cost lender in the U.S. So we looked at tens of thousands of real loans from thousands of lenders to figure out whether our prices were consistently better (these are all anonymous, by the way – we only needed to know the loan details). Since points and fees are all over the place, we wanted to do an honest comparison. We said: if the exact same person with the same financial scenario went to us at the same time, and we gave that same person the exact same rate, what would we need to give a credit or add a point fee.
Here’s what we found:
- 9/10 people overpay for their mortgage
- A typical house buyer would save over $5,000 with Tomo
- Some lenders are ridiculously over-charging people—$10,000 or even $20,000 more!
How do par rates differ between homebuyers?
Here are a couple of examples of how par rates can differ between homebuyers’s unique financial pictures.
- Credit score:
- Homebuyer A: With a top-notch credit score of 780, this borrower might get a par rate around 5.8%.
- Homebuyer B: With a credit score of 620, they could see a higher par rate, like 6.2%, because the lender sees them as a higher risk.
- Down payment:
- Homebuyer A: Putting down 20% could get them a par rate of 5.7%.
- Homebuyer B: With just a 5% down payment, their par rate might go up to 6.0% since a smaller down payment means more risk for the lender.
Is the par rate the same as the interest rate I’ll pay?
Not necessarily. The par rate is your starting point, but your actual interest rate could be higher or lower depending on whether you choose to add lender credits or discount points. Once you lock in your rate, that will be the interest rate you pay for your loan.
Is it better to choose a par rate or pay points for a lower rate?
It depends on your situation. Paying points can lower your rate but requires a higher upfront cost. Buying down the rate involves paying points upfront, usually costing 1% of the loan amount per point. So, if you decide to buy down your rate from 6% to 5.75%, you might spend around $3,000 (1% of $300,000) to achieve that reduction.
Example Calculation:
- Upfront Cost: 1% of $300,000 = $3,000 (to buy down the rate).
- Monthly Savings: $90 (from reducing the rate).
- Break-Even Point: $3,000 (upfront cost) / $90 (monthly savings) ≈ 33.33 months.
After about 33 months, the total savings from a lower monthly payment will equal the upfront cost you paid to reduce your rate. So, consider your financial situation and how long you plan to stay in the home to determine if paying points is worth the upfront cost for long-term savings.
What factors can cause the par rate to change before closing?
Factors such as market interest rate fluctuations, changes in your credit profile, or economic conditions can affect the par rate. For example, if the Federal Reserve raises interest rates, your par rate might increase before closing if you have not locked in your rate yet.
Can the par rate change after I lock it in?
Once you lock in your rate, it typically stays the same. However, check your loan agreement for any terms that might allow changes under specific conditions. For example, if there’s a significant shift in your financial situation or market conditions, your locked rate might be affected. Ensure you understand the terms of your lock to avoid surprises.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.
