Float-Down Option: Can It Lower Your Mortgage Rate?
Sam Hawrylack5-minute read
April 19, 2021
Locking in an interest rate can feel suffocating. What if rates drop? Many home buyers wait until the last minute to lock their rate, so they don’t get stuck with a higher interest rate. But that’s not the only way.
A float-down option can protect your rate, locking current rates in but giving you the option to lower the rate should they drop within a specified time and for a certain amount.
What Is A Float-Down Option?
A float-down option gives you the opportunity to take advantage of lower interest rates if you’ve already locked your mortgage rate. Lenders have rules regarding how and when you can use the option to float the rate down, and most lenders charge a fee, which is usually a percentage of your loan amount. The float-down agreement allows you to lock in rates to hedge against higher rates while taking advantage of lower rates if they fall.
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How Float-Downs Work
If you want the option to float down your rate, you must lock a rate with a float-down provision. Not all lenders offer it, so read the fine print.
If you have a float-down option, you must know how it works, aka what circumstances must be present for you to take advantage of the lower rates.
Here’s how it works.
- Read the fine print on your float-down agreement.
The lender will dictate how much rates must fall for you to exercise your option. For example, they may say rates must drop 0.25% – 1%. It varies by lender. If a lender says rates must drop 0.5% to use it and you locked a 4% rate, you couldn’t exercise the option to float down until rates hit 3.5%. If they hit 3.75% or 3.65%, for example, you can’t use it.
- Know the float-down fee.
Every lender charges a fee to float the rate down, but some charge more than others. Know the fee, and make sure you can afford to cover it at the closing. You don’t have to pay the fee upfront, but rather at the closing.
- Your rate lock expiration doesn’t change.
No matter when you float the rate down within the lock period, the expiration stays the same. For example, if you have a 30-day lock and there are 10 days left when you float the rate down, you still have 10 days to close the loan without the rate expiring.
- You’ll need lender approval.
Your lender must approve the float-down, which may mean they’ll require your loan to be about ready to close or at least approved without any large conditions. Know what a lender requires before attempting to float the rate down.
The only way to exercise the float-down option is to ask your lender for it. Even if your rate lock agreement has the provision, it doesn’t automatically happen. You must activate the offer and get lender approval.
Securing A Float-Down Option
Not all rate lock agreements include a float-down option. If it’s important to you to have the opportunity to take advantage of lower rates, make sure the agreement consists of one. Pay close attention to the fees, though, as it may not be worth it to you to lower the rate if the costs are unaffordable.
Paying For A Float-Down
A float-down provision may cost between 0.5% – 1% of the loan amount. If you have a $200,00 loan, that’s $1,000 – $2,000 to float a rate down.
Whether it makes sense to do so depends on the situation. If you’re buying a home for temporary reasons, floating the rate down probably doesn’t make sense. You’ll pay more money to get a lower rate yet won’t be in the home long enough to enjoy the savings after paying the fee to lower the rate.
If you’re buying a home as your “forever home” or at least a long-term home, it may make sense. The easiest way to tell is to figure out your break-even point. Look at how much the rate will save you per month and then determine how many months you must be in the home with those savings to cover the float-down cost.
Monitoring Mortgage Rates
Monitoring today’s mortgage rates is easier than ever. When you monitor rates, make sure you look at the right mortgage type, such as 30-year fixed, 15-year fixed, or FHA 30-year fixed. Each loan has different rates.
Look closely at the rates, daily change, and yearly change to give you a good idea of what rate is “good” and when you should lock in the rate. Also, monitor mortgage rates if you have a float-down mortgage to decide if and when you should exercise the option. Read the fine print in your agreement to determine when you can float it down as some lenders have a cut-off, especially as you get closer to the closing. Most lenders also require that you have an approved loan (with conditions) before using your float option.
Exercising Your Float-Down
Because the float-down option isn’t automatic, you must let your lender know when you want to exercise your right. A quick phone call to your lender to tell them you want to float your rate down does the trick. Be specific about your request so you can take advantage of the low rates while they last.
Should You Get A Float-Down Option?
The float-down option isn’t for everyone. First, decide how long you’ll be in the home. If this is a long-term purchase, getting the rate as low as possible is essential. The longer you’ll carry the mortgage, the more important it is to get the lowest interest rate possible. Even lowering a rate 0.5% could save you tens of thousands of dollars over a 30-year term.
If interest rates have been volatile and you’re nervous about it increasing, you can lock a rate in and pay for the float-down option. This way, you get the best of both worlds. You can take advantage of lower rates if they occur, but you also hedge against increasing interest rates.
- Protection against higher interest rates
- The chance to take advantage of lower rates
- Peace of mind that you have a rate locked in
- A rate lock with a float-down option is more expensive
- You must still check mortgage rates to see if you can use your float-down option
- It’s speculative since no one can predict what mortgage rates will do
A float-down isn’t the only option you have when choosing the correct interest rate. If you don’t want to pay the extra fee for a float-down, you have other options, including:
The Bottom Line: A Float-Down Can Offer The Best Of Both Worlds
A float-down option gives you the best of both worlds. You lock in your interest rate but have the opportunity to lower it one time should rates fall. It’s not for everyone since it costs more money for the option, but it’s one of the many options you have. If you’re ready to see your loan options, apply for a loan online.
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