A mortgage par rate is a base mortgage rate a borrower qualifies for without any payments of premiums or discounts. Few mortgages are originated at the par rate, because this rate represents the least potential for profit for the lender. Lenders offer incentives to encourage people to take out mortgages over or below par with the goal of making more money on the loan, either in the short term or over time. Borrowers should be aware that rate sheets and quotes on mortgage rates can be very confusing, sometimes deliberately so, and it's important to get quotes from multiple institutions or brokers to get an idea of what is available when preparing to take out a mortgage.
The par rate is based both on a borrower's credit and on mortgage rates in general at the given time. Borrowers can opt to pay for “points,” discounts on the interest rate, at the time the loan is originated, to take out a loan below the par rate. While coming up with up front payments can sometimes be difficult, people will pay less over the life of the loan as a result of bringing the interest down. Lenders allow borrowers to do this, as it allows them to pocket more money when the loan is generated.
It is also possible to take out a loan above the mortgage par rate. In this case, the bank pays a premium to the broker for originating a loan above par, and the borrower theoretically pays less up front when the loan is created. Borrowers may have a number of reasons for taking out loans at an interest rate higher than the one they qualify for, and incentives are often added to the deal to encourage borrowers to do this, since the higher interest represents more potential profit to the lender, without the added risks associated with bad credit.
The mortgage par rate is also considered when valuing mortgages. When institutions buy and sell mortgages, the par rate may be used to determine how much an individual mortgage is worth. If the mortgage is above par, it is worth less, as such mortgages tend to be repaid faster. Financial institutions package mortgages and other products for sale carefully to maximize their potential profits on the sale, while institutions making purchases review their available options carefully to select the best value for their money.
Mortgage par rate quotes fluctuate considerably. On any given date, the mortgage par rate can be very different, and individual circumstances complicate the par rate even more. In addition to the borrower's credit history, other factors involved can include the type of property and the region.