Lenders have a different par rate for different types of borrowers, which is the base around which they have the ability to negotiate deals. The par rate will be based on the prevailing interest rate environment, with factors changing it slightly for different potential borrowers and the risk associated with them based on creditworthiness.
Par rate is the fair market value of a loan for a person with certain risk characteristics, from a lending institution of certain size and qualities. The par rate is the reference point around which a borrower and a lender will strike a deal, even though this is often unknown to the borrower. If the lender, which might be a bank loan officer or a mortgage broker, gives the borrower a break on the front-end cost of the loan, the borrower might have some interest tacked on to the par rate to make up for it.
If the borrower pays more money down up front, they might be given a lower interest rate. Some lenders use a system of points that borrowers can purchase on the front end to lower the rate. The broker or loan officer might make more money in one situation or the other, depending on how compensation is structured.
If a rate is higher than par, it creates what is called a yield spread premium (YSP) or service release premium. At a credit union, which is a mutually-owned institution, it could be that this spread pays off some of your mortgage early or lowers other payments.
It could also be that this premium goes into the pocket of the lender or the broker. Rates below the par rate create discount points that must be paid from somewhere, such as a higher downpayment.
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