Mortgage Rate Lock Float Down Definition

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Mortgage Rate Lock Float Down Definition

What Is a Mortgage Rate Lock Float Down?

Mortgage rate locks are a word. When a mortgage interest rate is locked in with the ability to lower it if market rates decline during the lock period, the term “float down” is used. Usually, a rate lock protects the borrower against increases throughout the rate lock term. With the float down option, the borrower is particularly permitted to profit from a decline in interest rates throughout the lock period.

Key Takeaways

  • An opportunity to lower the rate if market interest rates decline throughout the underwriting period is provided by a mortgage rate lock float down.
  • The float down option enables borrowers to benefit from a rate decline throughout the lock period while providing protection against rate increases for borrowers.
  • The charge for using this option varies depending on the lender.
  • It is up to borrowers to get in touch with their lender if they wish to use the float down option since lenders don’t notify borrowers when rates drop.

How a Mortgage Rate Lock Float Down Works

When interest rates change, homeowners may benefit from the protection and flexibility provided by a mortgage rate lock float down package. The borrower may fix their mortgage rate thanks to the mortgage rate drift down. However, customers may use the float down option to get the mortgage approved at the lower rate if rates decline while the application is being reviewed. When mortgage rates vary or have been increasing and dropping over a short period of time, this can be a wise choice.

To benefit from a cheaper mortgage interest rate, borrowers may seek to use the float down option at any point before the mortgage closes. Depending on the conditions with the lender, the float down option may be used as soon as one week after the mortgage procedures begin. The duration of the lock should be specified in the terms; it may be 30 or 60 days. While their mortgage application is being completed, the borrower might benefit from lower interest rates throughout this time frame.

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Because they don’t want the borrowers to shop about or finance their loan with an other institution or broker, lenders may provide consumers the option of a rate lock float down. Since banks only profit from mortgage interest after deducting any expenses associated with servicing the mortgage, the lender prefers to have the borrower’s business in the long run.

There is a fee associated with the float down option on a rate lock. For the flexibility of the float down option, the borrower must pay a charge, which, depending on the lender, might be a few or several hundred dollars. Rate locks that include the float down option are thus more costly than rate locks that do not.

Special Considerations

The float down option may be accessible to borrowers, although reduced rates are not always the result. As the lender is not required to advise the borrower that rates have decreased, it is their duty to choose the lower rate. To ask for the float down option, the borrower must give the mortgage broker or lender a call.

As your lender is unlikely to advise you of the ideal moment to exercise your float down option, make sure you stay current on mortgage rates.

Here’s another thing to think about. It definitely doesn’t make sense to pay for the float down option if rates decline, stable, and then seem to be near the bottom of the rate cycle. The charge for the float down option may be more than covered by borrowers’ desire to see rates down enough. It’s unlikely that a decrease from 5.10% to 5.00% throughout the underwriting process will be sufficient to make up for the expense of the float down option. However, if it is anticipated that rates would decrease from 5.10% to 4.60%, the savings over time would probably outweigh the charge for the float down, making it a wise choice.

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If rates drop low enough to pay the closing fees of a new mortgage and allow for long-term savings, refinancing can be a possibility. Many lenders let customers to refinance as soon as six months after the closing of the mortgage. In other words, you may always refinance and benefit from the lower rate if you miss the opportunity to drift down and rates drop by a half-percentage point or more.

Mortgage Rate Lock Float Down vs. Convertible Adjustable-Rate Mortgage (ARM)

With a fixed-rate mortgage or a rate lock, the mortgage rate lock drift down begins, but the borrower has the option to choose a lower rate if rates decline. Normally, the opportunity to get the cheaper rate expires after 30 to 60 days. Contrarily, a convertible adjustable-rate mortgage (ARM) enables the borrower to benefit from reduced rates for a period of time before switching to a fixed-rate mortgage.

A variable-rate mortgage starts off with a significantly lower initial teaser rate, but after a certain amount of time—usually three to ten years—the rate is changed in accordance with an index plus a margin. According to the conditions spelled forth in the contract, the rate is usually changed every six months and may increase or decrease.

Convertible ARMs often include stipulations and are touted as a method to benefit from dropping interest rates. A fee is often assessed by the financial institution when an ARM is converted to a fixed-rate loan.

Example of a Mortgage Rate Lock Float Down

Assume a borrower locates a house and submits an offer. Before the closing in 30 days, they are now in the process of underwriting the mortgage. The borrower chooses to use a float-down option since interest rates have decreased recently. Their rate lock float down option can like this:

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  • The mortgage’s rate lock is set at 4.25% for a 30-year period.
  • For the opportunity to reduce the mortgage’s rate lock, the borrower must pay a charge.
  • Mortgage rates drop to 3.80% two weeks later, and the borrower chooses to activate the float-down option.
  • The mortgage rate is fixed at 3.80% for the duration of the loan at closing. In other words, the interest rate is set at 3.80% for the duration of the loan.

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