Par rate is the mortgage industry equivalent to true dealer cost in car pricing

Myth #9: What rate you see, is what rate you get

When searching for a new vehicle, car shoppers often make use of services like Kelly’s Blue Book or Truecar to research the following details about potential vehicles.

MSRP: A car’s MSRP, short for a manufacturer suggested retail price, is the price that the vehicle manufacturer tells dealers they should charge. 

Invoice is what the dealer says they got the car for. Smart buyers know there is more to that

True dealer cost is the actual price a dealer pays for the car after getting all the kickbacks

Knowing these values helps you avoid getting ripped off, as your objective is to get as close to the True dealer cost as possible.

Here is an example of a Cadillac with basic options with both KBB and Truecar.

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The mortgage business has a very similar setup, let’s look at those layers.

Savvy buyers usually ignore the MSRP, as they are outdated. Instead, they know that the key to the best car price lies in the True dealer cost. This is the actual amount that a dealer pays for a car after getting all of the kickbacks associated with the deal. Knowing these values can help you get as close to the true dealer cost as possible, which can ensure that a car buyer gets the best deal possible.

The mortgage industry has interesting similarities with the car industry when it comes to pricing mortgage rates. Similar to the auto industry’s MSRP, the mortgage industry’s advertised rate is what a lender recommends that a loan officer offers to a potential borrower. The mortgage industry’s Par pricing is likewise comparable to the auto industry’s true dealer cost.

A Par mortgage rate is the lowest rate that a loan officer can offer to you. When a loan officer offers a Par rate, he or she will neither make nor lose money. This means that a loan officer’s goal is to get you locked into a rate that is as high above the Par rate as possible.

The main issue with Par rates is that every lender has its own pricing and markup – this leads to a lot of moving parts. The Fed sells to the wholesaler, who sells to the lender, who marks up the loan to the loan officer, who sells it to you. The best place to start when sorting all of this out is the Par pricing.

However, at this point, it is important to be aware of the seesaw relationship between Par rates and closing costs. While you might manage to get a great Par rate, you may end up being offered a higher closing cost in an attempt to make up the difference. Closing costs are a sneaky way that lenders hide costs so as to hinder your ability to effectively compare the total costs between mortgage rate quotes.

Unlike cars, Par rates are calculated based on a potential borrower’s individual risk profile. This means that you need to be able to calculate your unique Par rate and the corresponding cost associated with it in real time. Parlend’s fair mortgage calculator is designed to help you do just that. Knowing your Par rate will ensure that you know your fair markup, giving you the negotiating power you need to get the best mortgage rate you can qualify for your risk profile.

 

Myth # 10: The relationship between Rate and cost does not matter


Check out our free mortgage shopping tools at https://www.parlend.com

When L̶e̶n̶d̶e̶r̶s̶ Loan officers compete, you win

Myth # 8: Reach 4 lenders and win

If you think when Lenders compete you can win, you probably watch too many TV commercials. There are roughly around 50 thousand lenders (Brokers and Banks) and 400 thousand loan officers among them. Loan officers work on commission for the most part. To comply with Dodd-Frank the LO typically can set their commission tier at whatever level they choose. That means a higher rate will pay them more commission. Is this illegal? NO.  Is it unethical? Should be. It means you will get two offers from two LO’s at the same lender. 

Yeah, you are probably saying they told you that they are on a fixed commission and do not operate like the old days. That is probably true because there is a fixed tier payout but the salesman is a salesman and they don’t work for free. So either with a number of loans, dollar amount of volume or something. There is always some incentive and when there is an incentive there is shady business.

You keep hearing the term when lenders compete you win. Is that even true?.

How could that be when Loan officers offer different rate and terms. You are probably under the impression that loan officers from one company will quote you the same rate and cost. The truth is far from it. To show you how crazy this is I asked “15” loan officers within “One”  company and often the same “office” and the responding results were:

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As you can see the rates quoted were 3.75% to 4.5%. This is not good news for anyone shopping under the slogan of “lenders competing”. Here is another example with all of the big Banks. How do you make sure you get the lowest offer from each lender? by shopping a lot of LO’s thats how.

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It means that borrowers have the huge task of reaching every LO with every lender in order to get what they want. Another word they will never get what they want unless they are either super lucky or have all the time in the world.

 

Myth # 9: What rate you see, is what rate you get


Check out our free mortgage shopping tools at https://www.parlend.com