Float-down option: Can it lower your mortgage rate?

The interest rate on your mortgage has a big impact on how much you pay each month and can affect your entire budget. A rate lock is a way that you can protect your interest rate while you wait to close on your mortgage. That way, if interest rates increase between the offer and closing, your mortgage rate won’t change. But what happens if interest rates drop during the interim?

A float-down option is a way you can take advantages of lower rates should they drop within a specified time frame. Though Rocket Mortgage^® does not currently offer float-down options, we believe information is power, so we’re here to help you understand this mortgage option.

What is a float-down option?

A float-down option allows borrowers to get a lower interest rate if they’ve already locked their mortgage rate. That means that if interest rates drop after you’ve locked your rate but before you’ve closed on your mortgage, you can adjust your rate to the lower one. This can help home buyers get a better interest rate, reduce their monthly payment, and pay less interest overall.

However, lenders have specific rules about how and when you can use the option. Lenders also typically charge a fee, usually a percentage of your loan amount. The float-down agreement allows you to secure a rate now to protect against future increases but still benefit if rates go down. Whether it’s worth the cost will depend on conditions and the likelihood of rates dropping in the near future.

How rate float downs work

If you want the option to float your rate down, then you must lock a rate with a float-down provision. Not all lenders offer it, so be sure to ask.

If you have a float-down option, the lender will determine how much rates must fall for you to be able to exercise your option. For example, they may require rates drop a minimum of 0.25% – 1% in order for you to float your rate down.

If a lender says rates must drop by 0.5% to use it and you locked in a 4% rate, you couldn’t exercise the option to float down until rates hit 3.5%. If they only drop to 3.75% or 3.65%, you wouldn’t be able to use it.

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.

How much does a rate float down cost?

Most lenders charge a fee to float the rate down, but some charge more than others. Float-down fees typically range from 0.25% to 1% of the total loan amount. For example, if you are taking out a $350,000 loan, the float-down fee could cost between $850 and $3,500.

When does a rate float-down option expire?

If you purchase the option to float down your mortgage rate, it typically expires when your rate lock period expires – which is typically closing day. However, some lenders require that if you decide to use the float-down option, that you do so a minimum of 5 to 15 days before closing.

Float-down options: What to know

If you’re interested in exploring a float-down option for your mortgage, here are some important details to understand.

Find out if your loan has 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, find out if your lender offers this option. 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.

Determine your break-even point

Whether it makes sense to pay for rate float down will depend on the cost and how much you stand to save. Your break-even point represents how long it will take you to recoup the upfront cost of this option. 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.

For example, let’s say your float-down option cost $2,000 and you’re able to float your mortgage rate down from 6% to 5.75%, saving you $49 per month on your mortgage. It will be 40 months before your savings will outweigh what you paid for the float-down option – which marks your break-even point.

If you’re planning to sell the home in the next few years before you hit this break-even point, you won’t be in the home long enough to enjoy the savings. Alternatively, if you’re buying your forever home or at least a long-term one, the potential savings may make the float-down fee worth paying.

Monitor mortgage rates

If you’ve been planning to buy a home, then you’ve likely already been keeping an eye on where current mortgage rates are and how they’ve been trending. Economists are always speculating on the market and making predictions, but it’s actions from the Federal Reserve that can really move the meter on interest rates.

Rates change every day, but you’ll want to monitor how they’re trending over the longer term to get a good idea of what a good rate is in the current market. This will tell you when you should lock it, and also if there’s a likelihood of rates dropping in the near future. That way, you’ll also know if it’s a good idea to use the float-down option.

Pros and cons of a float-down mortgage option

The float-down option isn’t for everyone. First, you must decide how long you’ll keep the home. If this is a long-term purchase, getting the rate as low as possible is essential. The longer you carry the mortgage, the more important it is to get the lowest interest rate possible. Even lowering a rate by 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 them increasing, you can lock a rate in and pay for the float-down option. This way, you get the best of both worlds. If interest rates drop, you can take advantage of lower rates but also hedge against rates increasing in the future.

Pros

Some of the potential upsides of a float-down option include:

• If interest rates drop, you won’t be bound to the rate you’ve locked.
• A lower interest rate can get you a lower monthly payment.
• A lower rate can save you tens of thousands of dollars over the life of the loan.
• The cost of this option could be offset by the amount you save over time.
• You get the peace of mind that you have a rate locked in.

Cons

If you’re thinking of paying for a float-down option for your mortgage, beware of the potential downsides:

• A rate lock with a float-down option is more expensive.
• You’ll have to hit your break-even point before you start saving money.
• If you sell the home before you have recouped the float-down fee, you’ll have spent more money on the float-down than the amount you’ve saved on interest.
• Trying to predict interest rates is only speculative, so there’s no guarantee that you’ll save money.
• Not all lenders offer the float-down option.

Other ways to lower your interest rate

If you don’t want to pay the extra fee for a float down, there are other options to obtain a better interest rate, including:

• Keep your rate and refinance the mortgage in the future when rates drop.
• Get an adjustable-rate mortgage and take advantage of lower rates when they fall – though you rate could also increase.
• Purchase discount points.

The bottom line: Lock or float?

A float-down option can give you the best of both worlds. You get to lock in your current interest rate but have the opportunity to reduce it if rates fall. With a lower rate, you’ll reduce the amount you owe each month and pay less interest over the life of your loan.

However, a float-down option for your mortgage isn’t free. You’ll typically have to pay an upfront fee, so you’ll have to make sure the potential savings outweigh this upfront cost. Determining your break-even point can help you figure out when you’ll start saving money and help you make an informed decision.

Ready to explore your loan options? Apply for a loan with Rocket Mortgage today.