Dec 29th 2008 02:32 pm Making Par — It’s even harder than you think
In the game of golf, “par” is a number that indicates the number of strokes – the number of times a player will hit the golf ball – that a very good player is likely to need to go from the tee to the hole. A par three hole ought to take three strokes, a par five hole, five strokes, etc. These numbers are targets and rarely met by you or me but Tiger Woods hits them nearly every time and frequently uses even fewer strokes, going “under par,” which is good in golf where the lowest score wins. The word “par” appears also in mortgages but it has a somewhat different meaning – the lowest possible interest rate on a loan from that lender on that day.
You’d think a lot of people could get par mortgages, but no. Almost nobody does. You can have the best credit, the biggest down payment, and the highest reserves imaginable and in most cases STILL not get a par mortgage. Why is that? Mainly we should blame mortgage brokers, somewhat blame the banks, but we should also blame ourselves a bit for that one.
Almost by definition you’ll NEVER get a par mortgage from a mortgage broker — that is unless that broker is your husband or wife, son or daughter. This is because par is the rate the broker pays – the best wholesale rate – and if he gave it to you he’d be giving-up much of his profit.
Mortgage brokers make their living in part through charging us a higher rate than they are getting from the bank, part by adding points to the closing cost of the loan, and finally by adding various fees like document preparation and handling. The median mortgage in the U.S. today is for $141,000 and has $3,500 in points and fees and the rate is often driven-up, too, by a point or more, which goes to the broker. In the business this added interest is called the “yield spread premium.” And hidden under all that sits the actual transaction, a par mortgage.
The teaser rate you’ll see on LowerMyBills or LendingTree or even BankRate.com is the so-called “National Average.” Think about what that means. It is the average rate THAT WELL QUALIFIED BORROWERS ARE ACTUALLY PAYING THAT DAY — NOT THE LOWEST RATE. The National Average rate INCLUDES some yield spread premium. So while the numbers change sometimes more than once a day, as I am writing this the National Average rate listed by BankRate.com is 5.53 percent while the true par rate is 4.875 percent for a conforming 30-year fixed-rate mortgage. Over the projected life of that $141,000 loan the difference in interest payments is $20,385 and the difference between the monthly payments is $57.
Now $57 per month may not seem like much and $20,385 over 30 years looks puny, too. But if you could get the par rate for that loan yet use the $57 per month saved to pay down the principal rather than buying coffee, then the interest savings grows to $41,628 (almost double) and you’d own your house outright four years sooner.
You’d think the way to get a par rate would be by avoiding mortgage brokers and borrowing straight from the bank, but that’s not so. Banks like to charge such fees, too, and they love to drive-up the rate if they can because they, too, have overhead to pay for and profit lust to satisfy. The cost of brick-and-mortar loan offices is such that banks generally make more money selling through brokers, which is why so many loans are done that way. Or were before the current mortgage crisis that is killing the brokers (Yeah!). But in this era of retrenchment the big lenders will still tend to cut their wholesale business through brokers in favor of their less profitable retail business through local offices just because that’s part of how they define themselves as banks.
It is very rare for ANY retail customer to get a true par rate loan from any lender. Take a lender like Ditech, for example, which is a division of GMAC that claims to offer very low mortgage rates. Forgetting the points and fees for a moment, if you look at Ditech’s best rate for today it is generally about a point above true par.
You’d think that in a competitive mortgage market some customers would get par loans, but they generally don’t. You’d also think that in a non-competitive mortgage market par loans – loans legitimately a point or more lower than the norm – simply wouldn’t exist. Yet they do exist.
The fact that most customers with good credit, big down payments and large cash reserves can’t get par loans comes down to the fact that the banks don’t really have to give them. Ultimately we go for the best loan we can get and if that’s above par we usually don’t know it. The bank comes out more ahead by keeping the whole issue of rates as murky as possible and losing the odd customer as a result.
So there are really only two ways to reliably get mortgage rates at par. First is by having some power or sway over the lender. Say you are a huge depositor in the bank, you are the mayor of the town where the bank is headquartered, or you are having an affair with a bank vice-president: You get a par loan. The other way is by finding a broker who will forgo the extra revenue that boosting the rate will allow. In historical terms that broker would be labeled as insane. So don’t expect to find one.
Most of us will never see a par loan rate, but it is important to know that they exist because they give us one tiny weapon to use in our mortgage negotiation. So when your broker or banker tells you that you qualify for a 5.875 percent mortgage and that’s a “great rate,” ask him or her what’s today’s “par rate.” Under the Truth-in-Lending statute they have to tell you. If they won’t then they are crooks so call up the state bank regulator and send them to jail. If they do tell you the par rate, as they should, then ask them to explain why it is that you don’t qualify? Ask, too, for statistics on how many customers DO qualify. what would it take for you to get from here to there? Make them squirm, but do it as late in the process as possible, then they can actually TASTE the loan adn might be more willing to give oup some or all of that yield spread premium.
Many mortgage applicants actually DO qualify for par, they just aren’t offered that lowest rate. Knowing it exists and asking the right way at the right point in the negotiation just might get you a better loan.
Or not.
Tags: mortgage, negotiation, par rate
Posted by cringely / Mortgage Language
BJ on 29 Dec 2008 at 4:44 pm #
This would have been nice to know 9 months ago
Thanks for the info! I intend to re-finance in a year or so if the rates stay as they are and will pack this in my arsenal.
Good info Bob! Keep it up.
Dennis Williams on 29 Dec 2008 at 5:00 pm #
Thanks Robert.Now that could be very usefull,or not
I Did’nt know that..Funny what the banks don’t whant you to know,
one might even think they are slightly dishonest or just greedy.
Great blog..Den
Greg on 30 Dec 2008 at 8:50 am #
Bob, followed you from cringely.com. Interesting blog. Thanks for the info
Craig Bromberg on 30 Dec 2008 at 12:42 pm #
Bob, I’m a big fan of your’s from your tech writing–you are far and away the best writer on technology today. But when it comes to mortgages, I think it would help a lot if you referred people to mtgprofessor.com where, for example, there is far more help–both in terms of writing and tools–regarding this issue than you will be able to provide. Mtgprofessor is the website of Jack Guttentag, a Wharton finance prof who has made it his life’s work to create transparency in mortgages. I believe that no one has done more to expose the issues behind mortgage pricing that Guttentag. He is, to my mind, the undisputed expert in this field. You’d do well to reference him liberally.
Dali on 30 Dec 2008 at 4:46 pm #
This is an idea I heard, not original, but I think it was amazing:
Loans should be changed from being defined as services to products.
Consumers are entitled to more concrete protection when it comes to products.
Would a car be approved to be sold if it had 1 in 6 chance of blowing up every year? Loans right now are sold as interest only to borrowers which depending on the re-set rate, will have a 1 in 6 chance of making the borrower default on his loan, bankrupt, ruing is life…
Laws passed to make products pricing clear. Many places (supermarkets) tell you the price per normalized unit (lb) so you can compare. Loans? not only you have APR, but then you have points and hidden fees (they only need to make a “best effort” estimate! what is that, the printing costs change dramatically over the period it takes to close the loan?)
Loans should be so simple a 13 years old should be able to compare and choose the best one. if not, we have a broken product pricing model. should be illegal.
What is documentation fee? printing fee? why not I pay your Electric bill while we are at it?
Zippy Mortgage Head on 31 Dec 2008 at 5:52 pm #
Bob,
Any mortgage person worth their salt would be more then happy to give you a par rate. you just have to ask for it.
but be prepared to pay more in origination. a typical deal at a Bank (note the capitol B)will have 1 origination and .5 to 1 point srp (srp is Bank speak for yield spread).
so hypothetically, if your banker has any sense he will gladly let you pay 1.5-2 points in origination and give you a par rate. why wouldnt he? as long as he makes his money it is all the same to him.
the point here is that the Bank is going to make it’s money. Banks are not the red cross and do not work for free. as long as they are making their money they are more then happy to discuss and negoiate with you HOW they make it. You are more then likely going to pay it either way and it is often smarter to pay it up front instead of over the next 30 years.
You can also ask your banker about buying the rate down. this is the same thing except the points you pay go on the discount side instead of the origination side. with the discount point you are paying your bank and whoever the bank is going to sell your loan to a premium to secure a better rate. if you plan to stay in the house for a long time it is worth looking at.
this does not get in to whether everyone thinks the Bank is gouging folks or making just enough. i am not here to debate philosphy, but if you want a par rate, email me and i will try to help.
Maurice on 02 Jan 2009 at 2:29 pm #
Par rate refers to the rate that the lender is willing to give to the broker without charging points. Above par and the broker makes a commission from the lender (yield spread premium), below par and the lender charges the broker for that rate who then charges you. It’s called “buying down the rate”. Getting par is certainly possible but as mentioned above the Broker will charge more in origination. All “No closing cost” loans use the yield spread to cover those costs. There are no free closings, it comes down to when do want to pay for it, up front or over 30 years. If you’re smart you’ll pay the extra points if you plan to live in the house for any time, it will cost you less in interest.
TheOtherLarry on 06 Jan 2009 at 4:04 pm #
I suggest an alternate and totally opposite view to getting a home loan: Go local.
Why pay for a middleman (Broker)? Why not get a par rate offered automatically?
After a disastrous situation with a well-known national finance company, I was determined not to let that happen again. So, I went shopping for a finance/mortgage company and the very first question I asked was, “Do you sell your notes?”
We found a local savings and loan company (only 2 branches in town) that did not sell their notes. We were offered a par rate loan for our refinance, and our refinance fees were less than $800 - mainly inspection and assessment fees, and a modest filing fee. That was almost 20 years ago. Seven years ago we refinanced with the same company. We took $20,000 equity out for some remodeling, reduced the loan to 12 years, and our loan rate? 5.00% APY. Our monthly mortgage payment was also reduced $10 a month to boot. Oh, and THEY decided to do a loan modification instead, which cost us a $150 filing fee. I will never again deal with a national finance chain, or a loan broker unless absolutely necessary!
So my advice to anyone: If you have decent credit and are established in your community, think small! Find a local bank and see if they won’t give you a better loan.
Cyano on 16 Jan 2009 at 11:59 am #
I have a better-than-posted rate on my mortgage.
Why? I negotiated. With multiple banks. And I made sure they all knew I was doing so.
It is that simple.
colluder on 10 Feb 2009 at 6:48 am #
Hmmmmm …
I noticed recently that home sales have tanked. And yet, the fee to sell a home has not fallen.
It’s still 5%. Or so my local Realtor tells me.
Now, if home sales have fallen (meaning demand is down relative to supply), shouldn’t the price of engaging a Realtor also fall?
Why hasn’t it? Why do Realtor’s all charge the same price, no matter what the market conditions are? Isn’t that illegal collusion. Are Realtors a real-estate cartel (similar to OPEC).
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vicki on 21 Jan 2010 at 10:07 pm #
Who the “F” wrote this piece of completely incorrect crap. You know just enough to make you very dangerous to consumers. I know I will be talking to myself because it’s 2010, but holy crap. Anyone can now and always could, get a Par rate. No Broker or retail mortgage loan officer “hides” a Par rate.It’s not a secret. You are given options. For 1 point this is your rate…for 1.50 points, this is your rate..and that is usually the Par rate, for you to say that 3.50 points is industry average even in 07 is flat out BS and someone who does not know what they are talking about. For zero points, this is your rate ( that would have YSP or SRP to pay the loan officer, that’s retail lending or broker) For your edification, whether you are a broker (who does get rates wholesale and they are lower than the big banks retail rates) or even if you work for the big banks, you cannot give a loan away to yourself or your relatives or your freinds. They mandate you collect a minimum of 1 point whether it be Over Par (SRP) or YSP, or offer the Par rate and collect 1 point origination. Now if you own the lending company and you decided to do a loan for free, well you can. Believe it or not, there are underwriters who work, there are processors who work, there are loan officers who work, guess what. They get paid for working. Big banks have VERY HIGH OVERHEAD and you will almost always get a higher rate, that’s why good brokers have lower rates. OK, I don’t want to even begin to tell how complicated it is to price (give a rate) on a loan. Loan to value, credit score, type of housing (condo, single family)……. all go into your rate. I don’t care if you google rates up the wazoo. It will be particular to your situation. GMAC, joke, the most points in the industry. By the way, PAR as rates, vary everyday lender to lender depending on what they need for their portfolio which is ALL SOLD. Clearly, the good news is, this report and blog didn’t get very far.
vicki on 21 Jan 2010 at 10:18 pm #
The Other Larry, if you refied 7 years ago your rate should have been around 3.875 at Par for a 10 to 15 year mortgage. You don’t get it, they have to and they will and they do make money off of doing a loan. Don’t you have to get paid when you work?? $150 is a standard loan mod fee, many people don’t realize they can do this, not all lenders offer this but most of the big banks do, just unknown and rarely asked. 99% your loan has been sold, your bank retained the Servicing Rights (collecting payments) they were paid SRP (service release premium) which to this day does not need to be disclosed and that is in question at this very moment, that’ s why you paid a higher rate and little to no closing costs. Arrrggghhhhhhh
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