Posted by Par pricing, buying your rate down or premium pricing – what does it all mean? Each relates to locking in a different interest rate.
What Is A Par Mortgage Rate?
Before delving into Buydowns or Premium Pricing, understanding Par Pricing/Par Rates must come first. What is a Par Interest Rate?
Par Interest Rate: Mortgage rate for a given scenario with no extra costs OR no lender credits
Par Interest Rates are not equal for all scenarios. For example, a Par Rate for a 640 credit score, primary residence purchase with 5% down differs from the Par Rate for a 740 credit score, primary residence purchase with 10% down. Additionally, Par Rates fluctuate as the rate market fluctuates.
Buying Down A Mortgage Rate (“Points”)
Knowing that “Par Rate” is the start point, Rate Buydowns make more sense. Buying a mortgage rate down (aka “Paying Points”) pushes a borrower’s rate below the Par Rate. However, borrowers pay extra fees up front to buydown.
Buydown Interest Rate: Mortgage rate below par obtained by paying fees (“points”)
The extra fees known as “points” equate to pre-paid interest. At least that is how the IRS looks at it. In short, a borrower pays points to Buy Down their interest rate below the Par Rate. The further below the Par Rate a borrower goes – the more it will cost them.
Lender Credits & Premium Priced Interest Rates
Premium Priced rates provide borrowers with a lender credit via a higher than Par Rate. That lender credit helps pay a borrower’s closing costs and/or prepaid taxes and insurance. To understand Premium Priced rates, you again start with the Par Rate.
Premium Priced Rate: Mortgage rate above par that results in lender credit to borrower
However, instead of lowering the interest rate below Par by paying points – Premium Priced Rates do the opposite of Rate Buydowns. The mortgage rate rises above the Par Rate. In return for the higher rate, borrower’s receive a lender credit toward costs and/or prepaids. The higher the rate goes, the larger the corresponding lender credit to the borrower.
There are specific limits and guidelines related to Buydowns and Premium Priced rates