For every borrower, whether they are purchasing or refinancing, the interest rate they get on their loan is probably their number one priority. No one wants to pay more than they have to.
Often borrowers get confused by the process. The more mortgage professionals you talk to, often the more intimidated and confused you feel. Several mortgage professionals may have virtually indistinguishable offers. Many times there is one offer that is either much lower or much higher.
As a rule, the customer ends up making their final decision on who represents them in their mortgage transaction based on one of two choices:
- The absolute lowest offer.
- The professional that makes them feel most comfortable
Sometimes this works out for the borrower and sometimes it doesn't. Many times the borrower has no idea how good or bad their deal is because they never take the time to educate themselves about the process. Once you understand the process of mortgage pricing you can assure yourself that the lowball offer you are getting from a mortgage professional is a real viable offer and not a bait and switch tactic. And you can also be assured that the mortgage professional that makes you feel so comfortable hasn't lolled you into accepting an unfair deal.
As an aside, there are several key things that you need to be aware of. There are no free lunches. Some banks will advertise that their mortgage professionals aren't commission based, to imply that you won't have some greedy salesman taking advantage of you for a higher commission. If you are working with a professional who is salaried, count on the interest rates being higher for that bank. The higher interest rates that are offered by that particular bank cover their salaried mortgage representatives. Everyone works, everyone gets paid. Again - No Free Lunches.
What you also need to know about banks is that they are not required by law to disclose to you how much they are making on the interest rate that they are giving you. Yes, the higher your interest rate is, the more the bank makes (see explanation below). If you're working with a mortgage broker you will find their compensation based on the interest rate you were given on the HUD (settlement sheet) at closing. Don't expect a Mortgage Broker to volunteer this information unless they're extremely honest and transparent. (See explanation below for the right questions to ask.)
Do all banks have the same pricing? The short answer is yes, and no. All banks get their money from the same place, so most times the difference in pricing between two banks is close. I often see rate sheets compare to one another within .125% to .250%. Sometimes banks have specials on specific loan programs, or a bank may specialize in a certain program that allows them to offer much lower pricing than the competition on a particular type of loan. But overall, if averaged, most banks are comparable to one another.
What often affects the drastic differences in rates that you might see on different mortgage offers is the Greed (or lack thereof) of your mortgage professional. I'll reiterate the point I made above: THE HIGHER YOUR RATE, THE MORE THE MORTGAGE PROFESSIONAL MAKES.
For every loan program that a bank offers (either directly to you as a borrower or through a broker) there is a rate sheet that looks like this:
In the first column you see a list of rates going from lowest to highest. To the right there are three columns which reflect the yield/cost of each individual interest rate, based on how long the rate is locked (15 days, 30 days, 60 days). If your rate is locked for a longer period of time, it will pay the mortgage professional less money.
Getting back to the title of the article (I know it took me long enough.), the PAR rate is the lowest rate on the Rate Sheet that doesn't cost money. On the example rate sheet above, a yield of 100 represents par. So any interest rate showing a yield of more than 100 is paying and any interest rate showing less than 100 is costing. For the example above 5.25% would be considered the par rate, because it is the lowest rate that doesn't cost money. You'll also notice that, even though it's a PAR rate, it actually pays your mortgage professional money.
How do you calculate the exact dollar amount that an interest rate may pay or cost? Lets take a couple of examples.
- 5.25 locked for 30 days. The yield on this rate is 100.448 (even though it is a par rate). To calculate the exact dollar yield, you take any amount that is over 100 and use it as a % of your total loan amount. .448% of a $400,000.00 loan amount = $1,792.00. Your mortgage professional could very easily "honestly" tell you you're getting a par rate and still be walking away from the table with a lot more money than what you're aware of.
- 4.875 locked for 30 days. The yield on this rate is 98.622. When you subtract 98.622 from 100 you have a cost of 1.378%. If you're financing a home for $400k, that cost is actually $5,512.00.
Hopefully this has helped pull back the curtain on the often secretive process of mortgage pricing. What, though, is the practical application of this knowledge?
As a consumer armed with this information, you now have the ability to hold your mortgage professional to a standard of truth, accountability and transparency by asking the right questions. Don't be afraid to ask:
What is the yield spread (the amount the mortgage professional makes off of the interest rate, often expressed in a percentage) on this interest rate? (Banks don't call the money made on the rate yield spread. If you're working with a bank directly, ask what the Overage is.)
If you are told that there is no yield spread (or overage), and no closing costs...chances are someone is not being honest with you. Remember, THERE ARE NO FREE LUNCHES. It's up to you to verify their story. If your loan hasn't been locked yet, ask to see the rate sheet for the day. (They're not obligated to give it to you, but asking will definately shake them up.) If your loan is already locked ask to see the lock sheet. This sheet will give you the rate and term (time in days) that your rate has been locked at as well as the yield/cost of the interest rate. This is especially effective if you think you were promised a bogus interest rate and the "mortgage professional" is just stalling to try and give you the bait and switch.
Remember closing costs can also be disguised as a multitute of small fees that your mortgage professional hopes you won't notice or question, but that is an entirely different blog post.
In this economic environment, it's important for you as a borrower to educate yourself and insure that you're getting a fair deal. Don't be afraid to ask questions, expect transparency and demand verification from your mortgage professional. Or better yet, research your mortgage professional in advance and feel comfortable that your dealing with someone honest and transparent before you start your mortgage transaction.
I hope this helps! If you need any clarification, just contact me!
Jason Sanders - Bringing Value to Financing - Residential, Commercial, & Hard Money
American Capital Finance
856 308 2462 - cell
856 792 9214 - direct phone
856 792 9215 - direct fax
Getting more referrals at www.TheValuePagesGroup.com
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