Locking the Mortgage Rate But Not the Points
April 6, 1999
"After reading your columns on the subject I thought I understood the ins and outs of locking the rate. Then I read a US Government publication which discusses the option of locking the rate but floating the points, and now I am confused all over again. Can you explain it?"
I checked out the publication you mentioned, "A Consumer's Guide to Mortgage Lock-ins", which was written by the Federal Reserve Board and the Office of Thrift Supervision in consultation with a long list of other Federal agencies, major trade associations and consumer groups. And there it was on page 5, "Locked-in Interest Rate-Floating Points." It makes about as much sense as a locked-in price of milk with a floating container size.
To illustrate, suppose the lender offers to lock the rate but not the points for 30 days, and you can select any of the rate/point combinations shown in the left column below. Next, assume interest rates rise during the 30 days, and at the end of the period (shortly before your closing) the lender is now offering the rate/point combinations shown in the right-hand column. Since you had "locked the rate (at 7%)", you will be offered 7% at closing, but since you didn't lock the points, you will pay the market price of 4.5 points. But these terms would have been available to you if you had floated both the rate and the points! Floating only the rate provides no protection at all.
As to how such a nonsensical idea could have survived the critical scrutiny of all the public and private agencies who were supposed to critique it, your guess is as good as mine. Perhaps they all assumed that the other agencies were on the alert so they didn't have to bother.
"After reading your columns on the subject I thought I understood the ins and outs of locking the rate. Then I read a US Government publication which discusses the option of locking the rate but floating the points, and now I am confused all over again. Can you explain it?"
I checked out the publication you mentioned, "A Consumer's Guide to Mortgage Lock-ins", which was written by the Federal Reserve Board and the Office of Thrift Supervision in consultation with a long list of other Federal agencies, major trade associations and consumer groups. And there it was on page 5, "Locked-in Interest Rate-Floating Points." It makes about as much sense as a locked-in price of milk with a floating container size.
To illustrate, suppose the lender offers to lock the rate but not the points for 30 days, and you can select any of the rate/point combinations shown in the left column below. Next, assume interest rates rise during the 30 days, and at the end of the period (shortly before your closing) the lender is now offering the rate/point combinations shown in the right-hand column. Since you had "locked the rate (at 7%)", you will be offered 7% at closing, but since you didn't lock the points, you will pay the market price of 4.5 points. But these terms would have been available to you if you had floated both the rate and the points! Floating only the rate provides no protection at all.
| Initial Market Quotes | Market at Closing |
| 6.00% and 4.50 Points | 7.00% and 4.50 Points |
| 6.25% and 3.25 Points | 7.25% and 3.25 Points |
| 6.50% and 2.00 Points | 7.50% and 2.00 Points |
| 6.75% and 1.00 Point | 7.75% and 1.00 Point |
| 7.00% and 0.00 Points | 8.00% and 0.00 Points |
As to how such a nonsensical idea could have survived the critical scrutiny of all the public and private agencies who were supposed to critique it, your guess is as good as mine. Perhaps they all assumed that the other agencies were on the alert so they didn't have to bother.