Par Rate & Discount Point Calculator
Understanding the Mortgage Par Rate
In the world of mortgage lending, the Par Rate is the base interest rate a lender offers a borrower at zero cost. It is the "neutral" point where there are neither discount points (costs to lower the rate) nor lender credits (rebates that cover closing costs in exchange for a higher rate).
How Discount Points Affect the Par Rate
When you "buy down" the rate, you are paying upfront interest to secure a rate lower than the par rate. Typically, one discount point equals 1% of the total loan amount. For example, on a $300,000 loan, 1 point costs $3,000. This usually reduces your interest rate by approximately 0.25%, though this varies by lender and market conditions.
Calculating the Break-Even Point
The most critical metric when deciding whether to pay for a rate lower than the par rate is the break-even period. This is calculated by dividing the total cost of the discount points by the monthly savings on your mortgage payment. If you plan to stay in the home longer than the break-even period, paying for the lower rate is generally a financially sound decision.
Example Scenario
- Loan Amount: $400,000
- Par Rate: 7.0%
- Target Rate: 6.5% (Cost: 2 Points)
- Cost: $8,000 upfront
- Monthly Savings: ~$135 per month
- Break-Even: Approximately 59 months (4.9 years)
If you intend to sell the house or refinance in 3 years, you would lose money by paying for the lower rate. If you keep the loan for 10 years, you would save thousands of dollars beyond your initial $8,000 investment.