October 24th, 2018
Exact interest rates are something most consumers have no idea about. Exact interest rates are one of those things that no one ever pays attention to, but they do exist and are rarely in your favor.
Lenders (be it mortgage lenders, credit card companies, car loans, or others) have calculated interest rates in 1/8 percentage increase or decrease. They calculate rates in increments or decreases of 0.125% (1/8%).
In the real world, Wall Street calculates down the one-thousandth of a percentage.
Actual rates might look like 4.334%, check the 30-year bond market at CNBC. Usually, US treasury bonds determine the rates for mortgages, but other factors such as secondary markets and investors also bear a great influence them.
Banks have “adjusted” the rate up or down to give consumers a nice exact rate on their loan. That rate of 4.334% would become 4.375%.
While you might not think much of that difference in the rate, it actually increases your monthly payment by $4.83.
This might not sound like much, but if you look at the big picture and do this several million times, you are now looking at a major profit for lending institutions.
What you need to know when obtaining a home mortgage is “Par Rate”.
Par rate is what lenders refer to as the exact rate that does not generate a lender credit (above par) or a rate buydown (below par).
You see, lenders cannot keep this extra money generated by the rate increase, and they actually give you a “lender credit” at closing.
So if the par rate is 4.334%, a lender will give you a rate of 4.375% and credit you at closing about $82.
But if par rate where 4.26% they would still offer you 4.375% and credit you about $230 at closing. This sounds great, but there is a better way to do this.
If you “buy down” the rate from 4.26% to 4.25% (the next 1/8 percentage) it would only cost you $20 extra at closing and your monthly payment would decrease by almost $10, that’s $120 a year for a $20 investment. Not bad.
If you want to learn more about how par rates work, you can read more about here (warning: not for the faint of heart).
It can save you some money, it might not be much, but if I worked for that money, I’d rather keep it in my pocket and not in the bank’s.
So the next time that you are looking at a rate, ask what the par rate is and see if you can save some money while you are at it.