Par Pricing Mortgage Option Still Available

It seemed like a good idea at the time: The Consumer Financial Protection Bureau was thinking that maybe lenders should be required to offer mortgage borrowers a zero-zero financing option, but after lots of letters and comments it ultimately rejected a zero-zero requirement.

What is a zero-zero mortgage option? And why would you like to see one? Let me explain.

Imagine you see a loan at 3.5 percent and 1 point or 3.625 percent and no points. Which is the better loan?

A “point” is equal to one percent of the loan amount. If we have a $100,000 mortgage a point will cost the borrower $1,000 at closing. Since the lender is getting $1,000 up front and making a $100,000 loan, the effective interest rate in this example is 3.581 percent.

Why? With a $100,000 loan at 3.5 percent the monthly payment for principal and interest is $449.04 over 30 years. However, if $1,000 is paid up front than the initial debt is $100,000 but the amount advanced is really $99,000. If the monthly cost for a $99,000 loan is $449.04 then the interest rate is 3.581 percent over 30 years.

Par Pricing

The combination of interest rates and points is often very confusing. Properly used points can help a borrower manipulate the interest rate and that can be a valuable tool when financing or refinancing real estate. For example, if you expect to be a long-term owner it can be advantageous to borrow at a lower rate by paying points upfront. Alternatively, if you expect to quickly sell then paying points upfront is a waste of money.

When trying to compare different loans one useful tactic is to ask the lender to provide “par” pricing; that is, a rate quote with zero points.

ZERO-ZERO Mortgage Quotes

The CFPB proposal would’ve gone much further than par pricing. Had it been approved the CFPB rule would have required lenders to offer borrowers the option of a loan where the interest rate could be seen with zero points AND zero fees. A zero-zero interest quote – whether for an FHA mortgage, a VA loan or conventional financing – would appear higher than the quotes normally advertised because it would include a provision for points and fees.

Although the CFPB decided against forcing lenders to offer a zero-zero quote option there is no reason why borrowers should not get a quote at par, in other words the interest rate expressed with zero points. This is not the same as a zero-zero quote but comparing loan options on the basis of par pricing can provide a straight and simple analysis of your loan choices.

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