What Is a Mortgage Rate Lock Float Down?

A 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.

Key Takeaways

  • A 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.
  • A limitation of a mortgage rate lock float down is that the borrower might pay hundreds of dollars for a service that goes unused. If the borrower misses out on the float down, and rates fall by a half a percentage point or more, there's always the option to refinance the mortgage and take advantage of the lower rate.

How a Mortgage Rate Lock Float Down Is Structured

A borrower can lock in their mortgage rate but also have the option to take advantage of a lower rate if mortgage rates fall during a specified time period. During the lock period, which could be the time it takes for the underwriting process, the borrower can take advantage of a fall in interest rates.

The mortgage rate float down allows the borrower lock in their mortgage rate, but if rates fall, they can opt into the float down to have the mortgage processed at the lower rate. However, the borrower pays a fee for the flexibility of the float-down option, which could be a few hundred dollars or several hundred dollars depending on the lender.

What Does a Mortgage Rate Lock Float Down Tell You?

As with any financial option, float-down options on a rate lock have a cost associated with them. As a result, rate locks with a float-down option are more expensive than rate locks without the float-down option.

Taking Advantage of the Float Down

As stated above, the borrower 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. Exercising the float-down option could occur as early as one week after the mortgage proceedings get underway, depending on the terms with the lender.

It's the borrower's responsibility to opt into the lower mortgage rate meaning the lender has no obligation to inform the borrower that rates have fallen. The borrower must call the mortgage broker or lender to make the request for the float-down option. It's important to know that the borrower will not automatically receive the lower rate.

The terms of the agreement should define the time frame that the lock is in place, which could be 30 or 60 days, for example. The time period allows the borrower to take advantage of improved interest rates while the mortgage application is being processed. The mortgage rate float down helps borrowers lock in the lowest rate that the market offers before the closing.

Why a Lender Would Offer a Mortgage Rate Lock Float Down

Lenders might offer the rate lock float down to borrowers because they don't want borrowers to shop around or leave for another lender or broker. Ideally, the lender wants the borrower's business over the long term because banks earn the interest on the mortgage minus any costs to the bank to service the mortgage.

When You Should Get a Mortgage Rate Lock Float Down

If mortgage rates are fluctuating or have been rising and falling over the last few months or year or so, it might be a good time to purchase the float down option. However, it depends on whether rates have a chance of falling during the lock period. Borrowers can check with various banks that offer mortgages to get a sense of whether the lenders believe interest rates might rise or fall in the next few months.

If rates have fallen, have stabilized, and appear to be at the bottom of the rate cycle, it probably wouldn't make sense to pay the few hundred dollars or so for the float-down option. Ideally, you'd like to see rates fall enough to more than pay for the fee of the float-down option. If mortgage rates fell from 5.10% to 5.00% during the underwriting process; for example, it might not be enough of a move in rates to offset the cost of the float down option.

However, if it's expected that rates could fall to 4.60% from 5.10% during the underwriting process, the savings over the long term would likely eclipse the fee for the float-down making it a good option.

It's important to compare all types of mortgages since the inclusion of a float-down option can come at a higher expense compared with other mortgages. If there is still leeway in the market for interest rates to decline, the float-down option could make sense. However, if the markets have already hit their floor, a rate lock might be sufficient.

Example of a Mortgage Rate Lock Float Down

A borrower has found a home, made an offer, and is now in the process of underwriting the mortgage before the closing in thirty days. The borrower decides to take advantage of a float-down option because interest rates have been falling over the last few months.

  • 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 option for the float down.
  • At the closing, the rate for the mortgage is set at 3.80% for the life of the mortgage. In other words, 3.80% is the fixed rate for the life of the mortgage.

The Difference Between a Mortgage Rate Lock Float Down and a Convertible Adjustable-Rate Mortgage

A convertible ARM is an adjustable-rate mortgage (ARM) that gives the borrower the option to convert to a fixed-rate mortgage. Convertible ARMs are marketed as a way to take advantage of falling interest rates and usually include specific conditions. The financial institution generally charges a fee to switch the ARM to a fixed-rate mortgage.

An adjustable-rate mortgage begins with a much lower introductory “teaser” rate, but after a set period (typically five years), the rate is adjusted according to an index plus a margin. The rate is generally adjusted every six months and can go up or down depending on the terms outlined in the contract.

The mortgage rate lock float down starts with the rate lock or with a fixed-rate mortgage, but the borrower has the option of exercising the option to take a lower rate if rates fall. However, with the mortgage rate lock float down, the option to get the lower rate expires typically within 30 to 60 days. On the other hand, the convertible ARM allows the borrower to take advantage of lower rates for a few years before converting to a fixed-rate mortgage.

Limitations of Using a Mortgage Rate Lock Float Down

A limitation of a mortgage rate lock float down is that the borrower might pay hundreds of dollars for a service that goes unused. If rates have fallen or are at historic lows, it might not make sense to pay the fee for the float-down option.

Also, the borrower can always refinance the mortgage if rates fall low enough to save the borrower money over the long term and enough to cover the closing costs of a new mortgage. Many lenders will allow a borrower to refinance as early as six months after the mortgage closing. In other words, if you miss out on the float down, and rates fall by a half a percentage point or more, you can always refinance and take advantage of the lower rate.