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

If you're buying a home and worried that the interest rate on your mortgage may increase before you close, a rate lock will freeze that rate and protect you against any increases for a specific amount of time. But what happens if interest rates drop in the meantime? A float-down option provides an exception to a rate lock and reduces your rate if market rates go down. Though Rocket Mortgage currently doesn't offer float-down options, we want you to understand the benefits and drawbacks as you shop for a mortgage.

What is a float-down option?

A float-down option allows borrowers with a mortgage rate lock to reduce their interest rate if market rates fall. This can help buyers get a lower interest rate, reduce their monthly payment, and pay less interest overall.

A float-down agreement gives you the opportunity when rates drop, while insulating you from the risk that rates may rise. This can alleviate some of the stress you may be feeling in your mortgage process.

This is different from a floating interest rate. When you float your rate, it isn't locked at all, meaning it moves up and down freely with the market.

Lenders have specific rules about how and when you can use a float-down option, and it comes at an added cost. Whether it's worth the cost depends on the conditions and the likelihood that rates will drop before you close on your home.

How rate float downs work

You'll need to tell your lender you want a float-down option when you get your rate lock. Not all lenders offer a float down, so be sure to ask your lender up front. Again, Rocket Mortgage currently doesn’t offer float-down options.

Float-down options require the offered rate to decrease by a minimum amount before the buyer can exercise it. For example, a lender may say rates must drop by 0.5% to exercise the option. If you locked in a 6.5% rate, you couldn’t exercise the option to float down until rates hit 6%. If rates drop to 6.25%, you would be unable to use it.

Because float-down rules vary from lender to lender, it’s important for borrowers to ask questions of your mortgage lender.

Even after you buy a float-down option, your rate won't automatically drop. You'll need to tell your lender you want to exercise the option and get lender approval.

How much does a rate float down cost?

Most lenders charge a fee for a float-down option. This is often in the range of 0.25% – 1% of the loan amount. While it is commonly a percentage of the loan amount, it can also be a flat fee. The cost depends quite a bit on the length of the lock.

For example, if you are taking out a $350,000 loan, the float-down fee could cost you between $875 and $3,500.¹

When does a rate float-down option expire?

A float-down option typically expires when the rate lock expires. Typical rate-lock periods range from 30 – 60 days, or even longer in some cases.

However, some lenders require you to exercise your float-down option a minimum number of days before closing. This ensures they have enough time to process the rate change before you sign your final paperwork.

How to decide if a float-down option is right for you

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

1. Find out if your lender offers a float-down option

Not all lenders offer a float-down option, so ask your lender if it's available. If having this flexibility is important to you, consider that when choosing a mortgage lender.

2. Weigh all the factors

Borrowers should weigh all the factors when deciding if a float-down option is right for them. Think about the current interest-rate environment, your specific closing timeline, and the cost of the float-down fee.

3. Determine your break-even point

Whether it makes sense to pay for a rate float down will depend on the cost and how much you stand to save. Your break-even point is the time it takes you to recoup the up-front cost of this option.

You can calculate yours by looking at how much the lower rate will save you per month and then determining 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 costs $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 take 41 months for your savings to exceed what you paid for the float-down option, marking 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.

4. Monitor mortgage rates

We encourage you to monitor current mortgage rates to see if they fall while you're waiting to close on your loan. Remind yourself that you can typically float your rate down only once, so think carefully before making the change.

Pros and cons of a float-down option

The float-down option isn’t for everyone. Let's look at the advantages and disadvantages.

Pros

• Opportunity to take advantage of falling interest rates: If the market drops, you aren't stuck with the higher rate you locked in.
• Protection against rising interest rates: You still get the safety net of your original lock if rates increase.
• Peace of mind during a long closing timeline: You don't have to stress about market volatility while waiting to move.
• Could save money over the life of the loan: Getting your rate as low as possible saves you money over the life of the loan.

Cons

• Added cost: Lenders charge an up-front fee, making a float down more expensive than a standard rate lock.
• Not always worth it: If you move or refinance before hitting your break-even point, you lose money on the fee.
• May be subject to a minimum rate-drop threshold: Rates typically must drop by a set percentage before the option can even be used.
• Not available from all lenders: You'll have to specifically shop around to find a lender offering this feature.

Other ways to lower your interest rate

A float-down option isn’t the only way to lower your interest rate. If you want the best mortgage rates, consider these alternative strategies:

• Improve your credit score. A higher credit score makes you a less risky borrower, which usually unlocks a better rate.
• Shop around with multiple lenders. Taking the time to compare loan estimates ensures you're getting the most competitive offer.
• Increase your down payment. Putting more money down reduces your loan amount, which can help you secure a lower interest rate.
• Choose a shorter loan term. A 15-year fixed-rate mortgage typically carries a lower interest rate than a traditional 30-year loan.
• Choose an adjustable-rate mortgage (ARM). ARMs often offer a lower introductory rate for the first few years of the loan.
• Purchase discount points. You can pay an up-front fee to permanently reduce your interest rate.
• Refinance your mortgage. You can skip the float-down now and refinance your mortgage later if rates drop and you qualify.²

FAQ

We’ve touched on the basics, but before we wrap, let’s answer some more questions you may have.

Is a float-down option worth it?

While interest rates aren't predictable, clients should weigh the cost of the float-down option against what they can expect to save if rates drop. You can get a feel for that by tracking mortgage rates and seeing how much movement there’s been leading up to you making your move.

What if I lock in my mortgage rate and rates go down?

If you lock your rate without a float-down option, your rate stays the same even if market rates fall. If you paid for a float-down option, you can adjust your rate to the new lower rate, provided the drop meets the minimum threshold.

How close to closing can you float down?

This depends on your lender's policies. While some allow it right up until closing, many require you to exercise the option a minimum number of days before closing so they have time to process the new paperwork.

Is it better to lock or float a mortgage?

If market rates are highly volatile or rising, locking your rate provides safety and peace of mind. Floating your mortgage saves you from paying an up-front fee but exposes you to the risk of higher payments if rates go up.

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 can 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 up-front fee, so make sure the potential savings outweigh the 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.

1 Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice. If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

2 Refinancing may increase finance charges over the life of the loan.

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