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Originally Posted by parched_son
Soup.... thanks for the insight. If you don't mind me probing (and since it's kind of on subject) could you explain par loans and how a borrower can get the best rates from a broker? Thanks man....
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Sure thing.
If you're interested in reading a bit more, here are a couple of old threads of mine -
NoSoup's Guide to Buying a Property: The Basics
NoSoup's Guide to Obtaining and Maintaining Excellent Credit
Ask the Loan Officer
A loan that is sold at "Par" basically means that it's a loan where the lender is lending the same amount of money as the borrower recieves at a specific interest rate. I know that might be a bit confusing, but it's helpful to understand how a broker can be paid.
For instance, if you were to come to me and ask for a loan, I basically work with a variety of lenders to find you the best interest rate. Once I have established which lender will give us the best deal, I look at their pricing sheet. In essence, this sheet tells me at what interest rates they'll give allow me to chose, and the amount of yield spread included at each rate.
A simple example -
You want a $100,000 loan for a house.
I decide to work with "ABC Bank" - and the pricing is as follows
6.50% - 101%
6.25% - 100%
6.0% - 99%
(the rate sheets are generally a lot more complex than that, but for this example, that's what we'll use)
What those figures translate to is the amount of money the lender actually gives me vs. the rate that you get.
If you were to get a $100,000 loan at 6.5%, they would actually give me $101,000 - the extra $1,000 is mine to do with what I please - I can either keep it or potentially put it towards the clients closing costs.
A "Par" rate is a rate with no return at all - in this case, 6.25%. If I were to get you a $100,000 loan at 6.25%, the bank would give me (the broker) exactly that.
"Under Par" would be where I have the client pay in additional money in exchange for a lower rate. For instance, if you were to only borrow $99,000, you would have a rate of 6.00%. Over the long term, this will likely save you significantly more than $1,000 - providing, of course, that you continue to stay in the property and don't refinance. This is often also referred to as "Buying down the Interest Rate" and should be available from any broker near you.
As far as getting the best deal from a broker, there are two main things that will likely give you the best results. The first, and easiest, is competition. Work with two brokers - and let each of them know that you're potentially working with someone else. They'll likely continue to undercut each other until they are close to losing money themselves. The second, as unprofessional as it sounds, is to estabish a good relationship with your broker. They'll be likely to charge you less if they consider you a friend.
If you have any more questions, please let me know!