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par rate

This is the third installment of Mortgage Week here at Suburban Dollar. Now that you have found a good broker and decided to get a fixed rate mortgage, you did decide on a fixed rate right, we are going to talk about how your rate is determined, what points are, and why you may or may not have to pay Principal Mortgage Insurance (PMI).

What is a Par Rate and How is it Determined

Par rate is the base rate charged by a lender, this rate requires no buy down and the broker gets no Yield Spread Premium (YSP). This rate is pre-adjustments, fees, or yield spread premiums charged by the broker. The Par Rate is then adjusted based on several factors such as:

  1. Credit Score: Your Fico is going to play a part in determining your base rate, the better your score the better your rate is going to be, a 720 or higher is going to provide the best rate without penalty. Lower than 720 and you are looking at potentially .50 to .75 point penalties depending on the lender.
  2. Loan to Value: Your percentage of equity vs your mortgage is taken into consideration in determining your base rate. While everyone tells you to shoot for no more than 80%, the rate schedule I am referencing actually penalizes you more for being between 75%-80% LTV.
  3. FHA Vs. Conventional: Whether or not you choose to go conventional vs. FHA is going to affect the base rate, FHA loans are more limited in the funding options than conventional mortgages.
  4. Lock Period: The length of time you choose to lock your rate for could also affect your final rate. Where par may be 4.625% for a 21 day lock, it could be 4.750 for a 35 day lock.  You have a better chance of getting a lower rate the less time you need to get your loan funded.

The below screenshots are of an actual wholesale lender rate sheet. 100.00 is par, anything below will cost the buyer money to get to that rate, anything over will result in the lender paying the broker (and he has a wife and kids so he needs to get paid):

RateSheet2

The following is the adjustments based on credit score, negatives cost you and positives will save you a little:

Adjustments

What are Points

Points are essentially fees paid by you to the lender/broker. Points are essentially just a percentage of the loan amount so 1 point will cost you 1% of the value of your loan. Points could show up either in the form of Origination Points or Discount Points.

Typically you will pay origination points in the form an origination fee, the origination fee is typically going to be around 1-2% of the value of your loan. As we discussed yesterday origination points are for the brokerage/lender to recoup the administrative costs of completing your paperwork and the amount of these fees may be negotiable.

Discount points are points paid to buy down the rate on the loan. Using the above lender rate sheet if you wanted a 50 day lock at 4.5% you are looking at at least .75 points to buy down the rate, this does not include any additional buy down charges by the broker. With discount points you are paying upfront to reduce your rate over the life of the loan. If you aren’t planning to stay in your house for an extended period of time it may not be worth the upfront cost to buy down your rate.

Principal Mortgage Insurance (PMI)

Back in the middle of the real estate boom, when I got my loan, it was very common for people to be getting 100% financing from lenders basically for just showing up at the door. The most common way of doing this was to finance a first mortgage for 80% and a second mortgage for 20%. This allowed you to keep your Loan to Value (LTV) below 80%. This type of loan arrangement is pretty hard to come by these days so more people are having to deal with the dreaded PMI which comes into play when the value of your mortgage is greater than 80% of the value of your house.

PMI is a type of insurance placed on your mortgage by lenders, (think AIG here), that ensures that you are going to pay your loan back and not go into default on the note. Most lenders will require you to pay for that PMI if your loan to value is above 80% on the loan for which you are applying. This is a pretty steep fee to be paying, in addition to interest, principal, and escrow. It is in your best interest to be able to bring enough of a down payment to the table to keep from paying PMI, but all is not lost. If at any point during the paying down of your mortgage your LTV gets to that magic 80% mark you can pay for an appraisal and get the mortgage company to take the PMI off.

The Rest of Mortgage Week:

05/05 – What is a Mortgage Broker

05/06 – Fixed Vs. ARM Rate Mortgages

05/08 – What to Expect When Closing Your Loan

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As I mentioned in my Net Worth Update yesterday, I am going to cover mortgages this week at Suburban Dollar. Today is a post dedicated to those people who make their living selling mortgages, the Mortgage Brokers. They aren’t your bank, or any bank for that matter. They have gotten a bad rap lately and have taken a good chunk of undue blame for the mortgage meltdown.

What a Mortgage Broker isn’t

A mortgage broker is not a lender. They aren’t your bank and they don’t actually lend you the money to fund your new loan. If you were to go to your bank to get a loan that bank would be the lender and the broker so the money would come directly from the company of the person you are working with. A broker on the other hand works like an intermediary between you and a pool of lenders.

What a Mortgage Broker Does

Typically your broker is going to get your basic information, income, creditworthiness, etc.. and determine the best type of loan for you FHA vs Conventional and then looking at the pool of lenders they have available determine which one is a best fit for your specific situation. They will also monitor their lenders for a rate you are looking for and lock it in when they see it. The broker is going to take your application and make the initial assessment on whether or not you are going to qualify for a loan. It is possible your loan could still fall through in underwriting, but not very likely.  Brokers handle the majority of the paperwork you end up signing and they make sure they have all of the appropriate documents in your file, T’s are all crossed and i’s are all dotted. They will request your appraisal and make sure it will cover the loan amount requested. Once they have all of the appropriate documentation they will send your paperwork to the lender for final approval, underwriting.

How Does a Mortgage Broker Get Paid

Brokers are paid in a couple of ways. The first and most upfront way is in the origination fee on the loan. You are charged the origination fee to cover the costs associated with paperwork and other administrative requirements for the application process. The broker is going to get a cut of that origination fee and the Broker company will get  most of it. Brokers can also get paid through what is called a yield spread premium. Essentially there is what is called a Par Rate for mortgages, anything above Par will result in the broker receiving money from the lender. So if Par is 1% and he gets you locked at 1.5% he is going to get a YSP paid to him from the lender he sells the loan to. A typical yield spread you could expect to pay on loan is going to be between .5% and 1% of the amount of the loan. If you were getting a $150k loan with a yield spread of .5% the broker is going to make $750.

Keep in mind that the fees the broker is going to get paid on are usually negotiable, even if they say they aren’t. Some things are out of their control like the appraisal fee, title insurance fees, and other third party fees. Origination fees, Yield Spreads, and other broker related charges could be negotiable. Make sure you are looking for a broker who is not going to be charging ridiculous fees with a 3% yield spread. Brokers need to get paid too so don’t expect them to do your loan for free but their fees should be reasonable, make sure they are willing to discuss what their YSP is going to be upfront.

If you are buying a new home you should also try to negotiate the realtor fees, they are going to be getting 6% of the value of your home where your broker is looking to make at best between 1 and 2% of the value of your loan.

What Should You Ask Your Broker

  1. What are your fees? And are you willing to negotiate them?
  2. What costs am I likely to incur for each type of loan?
  3. Do you offer rate locks and for how long? (guarantees an interest rate for set amount of time)
  4. What is your Yield Spread Premium?
  5. What is Par Rate at each of your lender?
  6. Is there a pre-payment penalty? (If they say yes… walk away)

Stay tuned tomorrow for more mortgage fun.

If you are currently looking to either refinance or buy your first house and live in KY, MO, SC, or TN you can e-mail for info on the broker I used, he will shoot you straight.

The Rest of Mortgage Week

05/06 –Fixed VS. ARM Rate Mortgages

05/07 – Par Rates, Points, and PMI

05/08 – What to Expect When Closing Your Loan

Photo: (WoodleyWonderWorks)

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