Mortgage Rate Lock Float Down Meaning Overview Examples
Mortgage Rate Lock Float Down: Meaning, Overview, Examples
What Is a Mortgage Rate Lock Float Down?
A mortgage rate lock float down is a financing option that locks in the interest rate on a mortgage with the option to reduce it if market rates fall during the lock period. A rate lock provides security against rate increases, while the float-down option allows borrowers to take advantage of rate drops.
Key Takeaways
– A mortgage rate lock float down locks in a rate during the underwriting period with the option to reduce it if rates fall.
– Borrowers are protected against rate increases while having the flexibility to benefit from rate drops.
– This option comes with a fee determined by the lender.
– Borrowers need to contact their lender if they want to exercise the float down option.
How a Mortgage Rate Lock Float Down Works
A mortgage rate lock float down offers borrowers security and flexibility when interest rates fluctuate. It allows borrowers to lock in their mortgage rate, but if rates fall during the underwriting process, they can opt for the float down option to get the lower rate. This is useful when rates are volatile.
Borrowers can request the float down option before the mortgage closes to take advantage of a lower interest rate. They can exercise this option as early as one week after the mortgage proceedings begin, depending on the terms agreed upon with the lender. The lock period is typically 30 or 60 days, allowing borrowers to benefit from improved rates during the application process.
Lenders provide the float down option to prevent borrowers from shopping around or financing their loan elsewhere. They want to retain the borrower’s business for the long term, as they earn interest on the mortgage minus associated costs.
The float down option comes at a cost. Borrowers must pay a fee for this flexibility, which varies depending on the lender. As a result, rate locks with a float down option are more expensive than those without it.
Special Considerations
Although borrowers may have the float down option, they don’t automatically receive lower rates. It is their responsibility to request the lower rate from their lender, as there is no obligation for the lender to inform them of rate decreases. Staying informed about mortgage rates is essential as lenders typically do not provide timing guidance for exercising the float down option.
Here’s another consideration: if rates fall and stabilize, and if they appear to be at the bottom of the rate cycle, it may not make sense to pay for the float down option. Borrowers may want to wait for rates to fall enough to offset the cost of the float down fee. For example, a drop from 5.10% to 5.00% during the underwriting process may not justify the expense. However, if there is an expectation of rates moving from 5.10% to 4.60%, the long-term savings could exceed the float down fee, making it a good option.
Refinancing could be another option if rates fall low enough to save money over the long term and cover the closing costs of a new mortgage. Many lenders allow borrowers to refinance as early as six months after the mortgage closes. Thus, if borrowers miss out on the float down and rates subsequently drop by half a percentage point or more, they can still refinance and benefit from the lower rate.
Mortgage Rate Lock Float Down vs. Convertible Adjustable-Rate Mortgage (ARM)
A mortgage rate lock float down starts with a rate lock or a fixed-rate mortgage, but the borrower can opt for a lower rate if it becomes available. This option expires within 30 to 60 days. On the other hand, a convertible adjustable-rate mortgage (ARM) allows borrowers to take advantage of lower rates for a few years before converting to a fixed-rate mortgage.
An adjustable-rate mortgage begins with a much lower introductory teaser rate, which is adjusted after a set period based on an index plus a margin. The rate typically adjusts every six months, up or down, as outlined in the contract.
Convertible ARMs are marketed as a way to benefit from falling interest rates and usually involve fees to switch to a fixed-rate mortgage.
Example of a Mortgage Rate Lock Float Down
Let’s say a borrower finds a home and makes an offer. They are in the process of underwriting the mortgage, which will close in 30 days. The borrower decides to take advantage of a float-down option due to recent rate decreases. Here’s what their rate lock float down option may look like:
– The rate lock for the mortgage is 4.25% for 30 years.
– The borrower pays a fee for the option to lower the rate lock on the mortgage.
– Two weeks later, mortgage rates fall to 3.80%, and the borrower exercises the float down option.
– At the closing, the rate for the mortgage is set at 3.80% for the life of the mortgage.
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