What Is a Mortgage Rate Lock Float Down?
Let me explain what a mortgage rate lock float down really is. It's a financing option where you lock in your mortgage interest rate, but you also get the chance to lower it if market rates drop during the lock period. A standard rate lock just shields you from rate hikes during that time, but the float down adds the benefit of grabbing a lower rate if things improve.
Key Takeaways
Here's what you need to know directly. This option locks your rate during underwriting and lets you cut it if rates fall. You're safe from increases, and the float down means you can capitalize on drops. Expect to pay a fee for this, and it varies by lender. Remember, lenders won't tell you when rates drop—it's on you to reach out and use the option.
How a Mortgage Rate Lock Float Down Works
Think of a mortgage rate lock float down as a product that gives you security and some wiggle room when rates are changing. You lock in your rate, but if rates go down while your loan is being processed, you can choose the float down to switch to that lower rate. This makes sense if rates have been up and down lately.
You can ask to use the float down before closing to get the better rate. It might be available as soon as a week in, depending on your lender's terms. The lock period is usually 30 or 60 days, giving you time to benefit from better rates during processing.
Lenders offer this to keep you from shopping elsewhere. They want your long-term business since they profit from the interest minus their costs. But this flexibility costs you—a fee of a few hundred dollars or more, so it's pricier than a basic lock.
Special Considerations
Don't assume you'll get the lower rate automatically if you have this option. You have to request it yourself because the lender isn't required to notify you of rate drops. Call your broker or lender to activate it.
Keep an eye on rates—your lender probably won't tip you off on the best time to float down. If rates fall and seem stable at a low point, skipping the float down fee might be smarter. You want the drop to cover the cost; a small dip like from 5.10% to 5.00% might not justify it, but a bigger one to 4.60% could save you enough long-term.
If rates plummet after you close, refinancing is always an option if it saves you money after covering new closing costs. Many lenders let you refinance in as little as six months, so you can still get a lower rate even if you miss the float down.
Mortgage Rate Lock Float Down vs. Convertible Adjustable-Rate Mortgage (ARM)
Compare this to a convertible ARM. The float down starts with a fixed rate lock, but you can drop to a lower fixed rate if rates fall, and the option expires in 30 to 60 days. A convertible ARM gives you low rates for a few years before you can switch to fixed.
An ARM kicks off with a low teaser rate, then adjusts based on an index plus margin, usually every six months, and it can rise or fall. Convertible ones let you switch to fixed for a fee, marketed for falling rate scenarios with specific rules.
Example of a Mortgage Rate Lock Float Down
Suppose you're buying a home and underwriting starts before a 30-day closing. You pick the float down because rates have been dropping. You lock at 4.25% for 30 years and pay the fee. Two weeks later, rates hit 3.80%, so you exercise the option. At closing, your fixed rate is 3.80% for the loan's life.
Frequently Asked Questions
What exactly is it? If rates fall during underwriting, this lets you lock in the lower rate and save money. How much does it cost? It varies, but often 0.5% to 1% of the loan amount. What else can you do? Skip it and refinance later, go with an ARM, or just lock and refinance if rates drop big.
The Bottom Line
Closing on a home involves tough choices, like whether to lock your rate. If the market's volatile and rates might drop before you close, consider the float down. You'll pay a fee, but the assurance of the best rate could be worth it.
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