Golfers already know - par is when you reach balance with the score on the golf course. Many golfers instead of writing down the total number of strokes record the number of strokes over or under the par. In golf par is the standard to aim for. The same applies in mortgage lending and investment borrowing.
Not every golf player "shoots at par". Others actually beat par - they beat the standard. Tiger Woods has a bad day when he shoots a par score on the golf course and I am joyous when I'm within 15 points over par. In fact that is my handicap. I have a handicap of 15. Essentially this means I can reasonably expect to have to hit the ball (add a stroke) on 15 holes and get the other 3 at par.
Par on the golf course is determined by playing a few games and keeping my score then using a weighted set of numbers called Course Difficulty and Course Slope. On a more difficult course I may actually shoot 17 over par and still hit my mark and on a less difficult course I may have to shoot a 13 or even a 12 over par game to keep my handicap.
All of the things that go into course difficulty and slop ratings have to do with the course itself plus a sampling of all the other "scored" games played on that course. To make it really fun the actual hole, called the cup, is moved around on the green, the condition of the turf (the grass), dry weather, wet weather, windy weather, and the list goes on, all effect the golfer's chance of scoring a par. All of those are a part of the risk and all go into the resulting score which is how far you are from par.
I think you probably know where I am going with this, eh?
Par interest rate is the zero rate. It's where the broker is not making any YSP (Yield Spread Premium). It is lower than the retail rate you would get if you called the bank directly. There are some very small but very vocal groups out their claiming the par rate is the rate the borrower is qualified for. Nothing could be farther from the truth. Par is the equivalent of wholesale.
Do you go into a restaurant expecting to pay wholesale for your prepared meal? If you do you must be uncle Posie who bargains with the checker at Publix over a can of peas. Let us look at that prepared meal. The restaurant has paid wholesale for the items and provided all the services needed to put that meal together. They have created a price and placed it on their menu. You have agreed to pay that price and calculate it to be a worthy value. In some ways loans are not too different but that's for another day.
Your interest rate (not the interest rate) is based on the risk you and your home present to the lender. So let's say the par rate is 6% for example. And let's say you are a very good borrower. You have a credit score of 800 plus, a debt-to-income ratio of 35% on all of your credit payments, 36 months of liquid reserves, your home is in a very low foreclosure area where values are still actually increasing (these areas do actually exist) and you only need to borrow 75% of your home's value. Chances are you are going to get the best rate available. If your loan amount is high enough and you are going to be paying your closing costs "out of pocket" you will be able to get the par rate. In fact you can even pay "discount points" to get the rate below par.
Closing costs are paid from somewhere and everybody pays closing costs. You either pay origination, discount or a premium rate. You may even pay a combination of the three. You want par? You will be paying the costs somewhere - either out of the proceeds of the loan, out of your pocket or in the rate.
One last note: the misconception (and it is a horrible misconception) is the brokers add the yield spread to the rate. Absolutely NOT true. If you want to get the broker's wholesale rate then you will have to pay all of the broker's fees out of pocket. The broker's par rate is not your rate, it is the wholesale rate. The par rate is lower than the rate you get from the bank specifically so the broker can be paid by the lender OR by you for part or all of their origination fees. This does not increase the cost of the loan to you over what you would pay at the bank.
If you have been quoted ANY rate with no closing costs you better have a very good understanding of what you are looking at because you can bet you ARE paying for closing costs - one way or another. If you are shopping and nobody has looked at your credit, income, assets, and property value the rate quote is worthless. The rate quote is no good if you do not qualify for it. Unfortunately the mortgage industry is still filled with liars and inexperienced loan officers who do not properly complete the Good Faith Estimate and Truth-In-Lending. And remember, until they have seen your credit, income, assets, and property value that GFE and TIL are still worthless.
When you're ready for the truth and you live in the Southeast call me. I will tell you the truth and if that doesn't sound good enough for you then you can go away. 866-946-0120 extension 101. America's most honest mortgage company. Seriously, we lose business every day because we refuse to lie. Unfortunately we have volumes of stories from people who could have had a great loan, reasonably priced and how we told them who ended up at the closing table feeling forced to sign documents and get a loan that was nothing like the big national lender told them it would. WE WILL NOT MISLEAD YOU but we will give you the choices you need to make an intelligent decision.
99% of borrowers do not understand the mortgage process. Do not be embarrassed to admit you don't. Every loan office who has been in the business can tell within a couple of minutes how knowledgeable you are just by the questions you ask. Least knowledgeable person's most often asked first question? "What are your interest rates?"
Thanks!
-Ken
Ken Cook 866-946-0120 extension 101
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Ken Cook - Georgia - FHA, USDA, VA and Conventional Home Loans (678) 439-8683
Excellent work, my friend. Good explanation in easy to understand terms. This is must read for Consumers & Realtors out there... knowledge is indeed power.
Ken - GREAT POST!!! Being married to a golfer, I made the rather odd correlation between golf scores and mortgage rates very early in my career. In my initial consultation with a client, I explain and educate my client on the entire loan process (including rates, loan origination, yield spread, adjustments, etc...).
I love it when I have a golfer for a client. It makes the whole rate conversation go so much smoother. They often enjoy the opportunity to apply something they don't know about to something they do. They love it!
This has always been a problem. When buyers call around or go on the Internet to shop rates, they have only one question; "What are your rates."
So, the buyer is quoted from low to high but they never really can compare because they don't know to ask the point/origination, lender fee, etc. They can't really compare.
If the structure of wholesale, points, fees, YSP is explained, buyers are very comfortable.
They just need help understanding what they're hearing. A good buyers agent, if they have one, can do this.
We have no problems.
Great post. I can always learn more! I have had clients tell me they are getting no closing costs before and I try to explain that they are not. Thanks for the honest info>
Ken - This is explained with great detail and is very clear. I think I'll have to repost it... not that you are not featured already or anything. :-)
With all due respect, I wanted to just comment on Lenn's response.. You are correct that it is the first questions most customers have, whether they are buying or refinancing. Typically, that is the question because they do not know what to ask. It really does not matter if the person has a good agent or not (although that really does help) but they have to find the right Mortgage Consultant to explain it to them. A truly good consultant will give them the details, even if they only ask the above question. And this can still be done without pulling credit in many cases (not all cases though). There are plenty of good buyers agents out there... but its not their job to explain it to the buyer. A great agent has enough information to get them intro trouble but enough knowledge to stick with what they do best. Instruct the buyer, sure. Make sure they are getting a good deal, of course. But it's best not to educate them. Let a professional do it for you. The trick for the Great Agent is to find a Consultant that they trust to go over the details with their customer.
Again, great post Ken and congrats on the Feature!
Ken - As you and I already know, John is correct when he said that the right mortgage consultant can explain this subject to them that can be directly applied to the client's specific situation. Well said John.
No disrespect to Lenn or her team, I'm sure she makes sure they are very well trained and informed, but quite often, some agents (whether they be buyers agents or listing agents) think they know more than they actually do. As John stated, they may know just enough to get them in trouble.
Ken, that is a good explanation, although a bit wordy. If you can find a good way to explain it with 1 paragraph and a simple illustration, you could probably make millions by educating folks!
Keep up the good work. Join my NEW group for professionals who work from their home office at http://activerain.com/groups/virtualoffice
Regina P. Brown
Excellent feature, gentlemen:)
Excellent Post. But if I am a consumer it does not get me diswayed from the bait and switch that happens everyday in our business. Only when closing cost are guaranteed the consumer will not have a surprise at closing.
Thanks
Tony
Ken--Great post...So easy to understand. Now this explains why so many people get different rates on the same day.
What? You mean that loan officer don't work for 1% origination alone?
But, look at all of those fees they are making money on!!
WEll, finally an explanation I ( a golfer ) understand. Thanks. By the way, even though I understood your example, my golf handicap is 26. Boo hoo.
Ken... this is awesome.... you stated this... "99% of borrowers do not understand the mortgage process."
Shit, excuse the French, but about 50% of the loan officers don't understand the mortgage process. lol
Overall, I loved your analogy and how creative you were in explaining this. greta job, hence the reason why it was featured...
good post man. Why didn't I think of golf as a good methaphor for the basis of explaining this is beyond me, but i'm glad someone did. thank you.
Great analogy ken. I do think the mortgage industry needs to do a much better job in a non-biased and informational way of educating buyers in how the whole process works, without trying to randomly piecemeal the information together on their own.
Jason - thanks my friend. Yes - more knowledge = more power!
Donne - thanks for your comments. I think people deserve to be educated even when they think they already know it all.
Lenn - thanks for speaking up in support!
Kristi - I'm to stupid not to stick with the facts :)
John - thanks for the congrats and I prefer agents don't try and explain the mortgage process but I do urge them to be familiar with it so they can sniff out a scam.
Regina - brevity has it's place but not in my blog :) By the way, do a little research on me (re: shorten it up and make millions teaching)
Tony - bait and switch was a killer before, during and after the boom. If all of the legit originators would ban together with a full frontal attack it would really help.
Teri - Thanks. Yes, the explanation is NOBODY can quote a real rate until they have examined the credit, income, assets, and property unless they are (at best) guessing or (in reality) lying. Most GFE/TILs are worthless. I have seen them without attorney fees, origination fees, and more.
Tom - ha! Wait, I can make 1%? Hmmmm...
Marian - the average duffer shoots a 114 and reports a 103 so I wouldn't sweat having a real handicap at 26.
Jeff - you are dead on right about 50% of the loan officers not knowing cradoodle. I don't even like talking about the mortgage industry with the average bank or lender loan officer.
John - you thought of it you just had not yet realized you thought of it! Thanks.
Chris - we who care do a LOT of education. You're not going to find the masses who work as mass volume loan officers at the big lenders giving a patootie about explaining. They get paid on volume and override and could care less about the borrower's life. We who live in the neighborhood and eat at the same restaurants as our customers take much more care to not do any messy stuff.
Ken ... very very well put. I thought I understood it pretty well, but that explained it even more clearly.
Nice job !
Cheers !
Sheldon
Ken- I love the golf analogy- great post!
Great read! Borrowers will eventually have to pay somewhere down the line. Some of them just don't realize it
Ken - What a coincidence - I also have a handicap, although mine is around 36 the last time I played. :) This was a stellar job of explaining how rates really work!
Ken, as usual a great explanation. Now you are educating the world instead of just me. And I suck at golf, but can beat almost ANYONE through the course with the cart... on or off of the cart trail.
;^ )
I had heard of PAR regarding loans before and nice to read your explanation. As far as PAR on the golf course, they happen way too infrequently for my liking.
Sheldon - thanks! Actually there is MUCH more to it but who wants to read the whole book for free on AR?
JB - thanks.
Joshua - yep. And the few percent who read this won't know whether or not to believe me.
Jason - thanks. I have another handicap but as long as I can remember 1+1 I can keep playing golf. Wait, now who are you?
Lane - somehow I imagine you would not enjoy golf nearly as much on "cart path only" days :/
Ronnie - thanks for commenting. Would love to play almost anywhere in Hawaii! That's a really amazing billboard of a signature you have there.
Ken,
GREAT post! We, too, have lost loans to others who "sell" mortgages rather than "originate" them. We have actually, on a couple of occasions, sat down with our customers and walked through a rate sheet and explained how pricing works. I wouldn't always recommend it, but when these particular customers were being LIED to, we had to put the kibosh on it quick.
Great job!
Maryellen
Maryellen - thanks! I actually have always gone through how pricing works if the borrower did not qualify for the lowest rates. I also always have explained how if they shop 2 mortgage companies (even if both are big, well known, national lenders or banks) they are going to get two wrong answers. When they insist on not giving any information but getting a rate I always say, "1%". I'm not being any more ridiculous than they! (And I can do 1% - there is actually a way. Of course I haven't had any takers :)
Hi Ken: What a great post - There is so much misconception abouts rates. I love the fact that you are candid and not afraid to lay the cards on the table. That speaks volumes. Thanks again.
Gwenn - thanks. I just wish we all did. SO many honest deals could have been done instead of all the misleading and bait and switch. How many times have I had clients to whom I offered a competitive rate with competitive closing costs leave for some pie in the sky from some bank or credit union only to call me from the closing table and ask, "can you still help me?" Not if you sign! Get up, walk away, come back here an PROMISE me you've learned your lesson so I don't waste another $1500 submitting your loan!
I have been known to get a golf cart "delayed" before... not stuck, it was recoverable.
Great post! I always find it hard to respond to someone who finds out I'm in the mortgage industry and they immediately as what rates are at. I only it were that simple. A wonderful explanation of how the rates work and I learned a little about golf too! :)
Get explanation and great analogy. It's all about a cognizant knowledge of the facts and reasonable expectations that are derived from them. Congrats on your post being acknowledged in the current edition of MWIR.
Ken I enjoyed this very much.
Great Post. Good job, it is very insightful reading all the posts on activerain.
Jose Lopez
I specialize in Sarasota Foreclosures and Bradenton Foreclosures
Great post. A must read for consumers