Have you ever called your local mortgage professional and asked them “what’s your rate today?”
If you have, you are not alone – it happens all the time.
And the process of quoting a rate is entirely too confusing (in my opinion) to consumers.
It is virtually impossible for consumers to have enough information to make a fair pricing comparison. The mortgage professional has all of the information, the consumer has limited information at best — and the end result is that the consumer potentially ends up paying more than they know they are paying to “get that great rate”.
How Loan Officers Determine “The Rate”
On a regular basis, we quote rates in a general way using a simple, easy to read format – something like you see below:
So if you were to call in and ask me on January 13 “what is your rate” for an FHA 30 year loan, you could reasonably expect me to say “5%” and if you wanted a Good Faith Estimate, the APR for the stated loan amount would be 5.543%.
Does this mean that 5% is a “par” rate?
In order to get the above rate quote, here is the wholesale lender’s rate sheet that I used:
Go to the 5% rate and see a 30 day lock and you get the number 100.229. This means that if we were to use this lender and lock this rate for 30 days and close the loan in that time, the lender will pay the loan officer .229% – or about $458.
Depending on whether the loan officer works for a broker or a banker, this $458 might be called SRP, Net Required Yield, Yield Spread Premium, Premium Pricing, Smoke-and-Mirrors… What it is called doesn’t really matter all that much. The point is that the loan officer is getting paid *something* from the lender for that interest rate.
A “par” rate is one that the lender is not paying the loan officer anything “behind the scenes”.
There are literally hundreds and hundreds of “what-if” scenarios about using different lenders (generally speaking, no two lenders rate sheets are alike – they all pay differently). There are different “hits” that will discount what the bank will pay the loan officer (ranging from what state you live in, to credit score to which way the wind is blowing) so it is not a simple calculation as to what a par rate is on any given day.
In my experience, what is the easiest way to explain this information to a client?
I show them one of the wholesale rate sheets that I am looking at and show them how to calculate their own rate. Often when I am working with a client in a Realtor’s office, I will bring in a wholesale rate sheet and show them how to calculate their own rate and it has never been “too complicated to figure out”.
Heck, if a loan officer can figrue it out – anyone can!