Above Par Pricing? What’s A Par?

I barely know what “above par pricing” means, and I have been in the mortgage business for 25 years! I’ll see if I can explain it, and why you need to know about it.

An analogy

Let’s say “par” equals the status quo. Better yet, envision par as the main floor of a hotel. Then there are floors above, and floors below ground. Par is “ground level” or “lobby level” in my hotel example. Par value, in finance and accounting, means stated value or face value. But that is confusing.

Remembering my hotel example, let’s look at par in a numerical format.

Par = 100.
So 101 is 1 above par.
101.5 is 1.5 above par.
102 is 2 above par.
Etc.
Get it?

So 100 = par = lobby level of the hotel.

Or you can go “below par” which would look like:

99.00 = 1 below par
98.50 = 1.5 below par
98.00 = 2.0 below par

An example

If I see an interest rate of 4.50% at 98, that means the bank wants 2.00 points (or 2% of the loan amount) to get to par (par being 100, 100-98 = 2), and then there is the 1% average commission due, so to get 4.50% in this case would take a quote of 4.50% and 3 points, 2 to give to the bank, and 1 to the lender brokering the loan to the bank.

As a loan officer, I know that the average commission on a loan is about 1%, also called 1 point. This is equal to 1% of the loan amount. If you are applying for a $400,000 loan, and if the lender is earning an average commission of 1%, that equals $4,000. The loan officer will usually earn anywhere from 50% to 75% of that commission, and the rest goes to the lender.

So a lender will usually price a loan at 101 give or take, which is 1 above par, which earns the 1% average commission.

Add-ons

Where this becomes important is if there are add-ons. An add-on is an extra charge to the market terms to build in for the extra perceived risk of a certain type of loan. More on this here and here.

If you have a 30 Year Fixed rate at the following prices…

4.75% 99.00
5.00% 100.00
5.25% 101.00

…then a mortgage lender may quote the following rates:

4.75% with 2 points (1 to the bank and 1 to the lender)

5.00% with 1 points (0 to the bank because they are at par already, and 1 to the lender which they get by collecting 1% or 1 point)

5.25% with 0 points (0 to the bank and 1 to the lender which they get by being 1 point or 1% over par, so the bank pays the lender their 1%, not the client. Of course the client is paying it indirectly by paying a higher rate).

Is this starting to make sense?

Condo add-ons

If you are buying a condo, and know there is a 0.75 point add-on, and if the rate is 5.25% at 102 (or 2 above par) then your rate quote is actually 5.25% at 101.25, or 1.25 over par, or 1.25% commission to the lender. Or on the same condo loan, the lender can take a 4.75% rate quote at 99.00, which is 1 below par, which means the bank needs 1 point and the lender needs 1 point, but then there is the 0.75 point add-on, so to get a 4.75% ate a condo buyer in this case would have to pay 2.75 points. Easy right?

Send some feedback and let me know if you understand. I’ll be happy to go through more scenarios. But this may help explain better why certain loan types (condos, investor loans, multi-family property) that have add-ons will either pay a higher rate, or higher points.