If you are trying to qualify for a mortgage today, at some point you are going to hear the term par rate.
A par rate is a term used in the mortgage world that refers to the standard interest rate calculated by an underwriter and assigned to a borrower for a specific lending product. A mortgage par rate is the interest rate a lender will charge a borrower without adjustments for lender credits or discount points.
Essentially, if a mortgage loan comes with a par rate, it means that loan is sold for the same amount to an investor in what’s called the secondary mortgage market.
For example, if you get a mortgage for $500,000 at a par rate, your loan is sold to investors in the secondary market for the same price – $500,000.
But if your lender sold your mortgage to an investor for exactly what it’s worth, how would anybody make money in the process of originating the loan?
Why It’s So Hard to Get a Par Rate Today
While a mortgage with a par rate comes with no extra cost to you as the borrower (meaning you are not being charged extra fees to secure that rate), what’s actually happening is that your loan is being sold for more to the investor in the secondary market – usually around 2 or 3% higher than the loan amount.
This is so your mortgage lender and everyone who makes the transaction happen can get paid. This is nothing new and it has been happening with nearly every mortgage for decades.
What’s different today is that it is very hard for YOU as the buyer to get a par rate on your mortgage. Today, it is almost guaranteed that you are going to have to pay some sort of premium (or points) to secure your quoted interest rate.
Why is that? Think about it this way: if you are an investor and you are buying a mortgage loan that is worth $500,000 – but you’re paying an extra 10 or 15 thousand dollars for it – how are you supposed to make money on that transaction?
Investors who purchase mortgages make money through yields, which are the earnings on an investment over a specific period of time. Ultimately, the interest rate on your mortgage is reflected in the yield that the investor who buys your mortgage can expect to earn.
But what happens if your loan gets paid off early? What happens when what the Fed is doing to lower inflation works and interest rates come down? You are most likely going to refinance your mortgage to a lower rate, and the investor is not going to be able to recoup the premium that they paid to buy your mortgage.
Good Sign for the Future of Interest Rates
While it might seem like a bad thing all around that you as the borrower have to pay a premium for your rate today, it’s actually a very good sign for the future of interest rates.
The fact that investors are not willing to buy loans at par today means that they believe that interest rates will go down in the near future as inflation starts to come down. Consequently, these investors are charging a premium upfront for rates to make sure that they are not losing money on their investment.
The Bottom Line
Even though you may not be able to get a “par” rate on your mortgage today, investing in real estate is still a very smart financial strategy.
Housing supply is still critically low, and while many buyers have exited the market in the wake of rising rates, demand for homes is still at a fever pitch. The rate of appreciation will start to slow slightly, but the low supply and high demand means that home prices are not going to come down.
Our advice is this: MARRY THE HOME, DATE THE RATE.
If you find a home you love and that you can afford (even if the payment is a bit higher), bite the bullet on the interest rate and start building equity. The market anticipates rates will go down in the near future and you will have an opportunity to refinance to a lower rate. The extra money you will spend on a higher rate for a little while is nothing compared to the wealth you will be losing out on by not earning equity on your home.
If you have been sitting on the sidelines waiting for a better time to enter the housing market, it might be time to start preparing. Be ready to find your dream home by scheduling a consultation with a NEO mortgage advisor. We can get you get fully pre-approved so you are prepared the second your perfect home pops up on the market.
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