What is “par” pricing?
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With par pricing, the lender will quote a rate with zero points. Instead of, say, “6.5 percent plus 2 points” you might get a quote of “7.00 percent plus 0 points.”
The reason that interest at par is higher than interest with points is that points are merely a form of prepaid interest. If you work the numbers over a 30-year period the cost of both loans is largely the same.
While both points and monthly interest costs are likely to be fully deductible, most people do not keep loans for 30 years. If the borrower in this example sells or refinances after 10 years, the effective rate for the note with points will be higher than 6.75 percent.
Lenders routinely have a series of rates and points for each loan product. For instance:
- • 6.5 percent plus 2 points
- • 6.75 percent plus 1 point
- • 7 percent plus 0 points
- • 7.25 percent minus 1 point
- • 7.50 percent minus 2 points
- • 6.75 percent plus 1 point
So, if you want a loan at 6.5 percent, you would need to pay 2 points at closing in this example. If a loan at 7.50 is acceptable, then you would get a credit from the lender at closing equal to 2 points — 2 percent of the loan amount.
When lenders tell you that they will pay some or all of your closing costs in exchange for a higher interest rate, all they’re doing is getting an interest rate above par.
Do higher rates make sense? In many cases, yes. The logic is that points paid at closing is cash gone forever, even if you only own the home for a short period of time, say less than five years.
When comparing rates, it’s always a good idea to ask lenders for par pricing — and then ask for alternative rate and point combinations.
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