DEFINITION of Mortgage Rate Lock Float Down

Mortgage rate lock float down is a mortgage rate lock with the option to reduce the locked interest rate if market interest rates fall during the lock period. A rate lock with a float-down option can provide the borrower with security against an increase during the rate lock period, while the float-down option allows the borrower to take advantage of a fall in interest rates during the lock period.

BREAKING DOWN Mortgage Rate Lock Float Down

As with any financial option, float-down options on a rate lock have a theoretical value or cost; therefore, rate locks with a float-down option are more expensive than rate locks without. The option will only be exercised by the mortgagor if interest rates fall.

How a Mortgage Rate Lock Float Down Can Save a Borrower Money

With such terms in place, a homeowner can request to exercise their float-down option at any time within the period before the mortgage closes to take advantage of a lower mortgage interest rate. Depending on the terms, this could even occur one week after the mortgage proceedings get under way. It is dependent on the homeowner to be aware of the lower interest rates and make the request for the float-down option themselves; they will not automatically receive the lower rate. The lender is not required to apprise the borrower of the lower rates or to initiate the float down option.

The terms of this type of rate lock should define the time frame that the lock is in place, which could be 30 or 60 days for example. This would let the borrower take advantage of improved interest rates while the mortgage application is still being processed. Such an option may be included with long-term, fixed-rate mortgages to give the homebuyer an opportunity to take advantage of the best rate options within the period.

Other types of mortgages might offer only a rate lock option. In this form, the rate lock can ensure that a borrower will commit to the agreed upon rate, regardless of higher interest rates the market experiences while the mortgage is being processed. By locking in the rate during this phase, it could discourage the borrower from looking elsewhere for a rate that is more agreeable to them.

The inclusion of a float-down option can come at a higher expense compare with other mortgages. If there is still leeway in the market for interest rates to decline, the option could make sense; however, if the markets have already hit their floor, a rate lock might be sufficient.