Float-Down Option: Can It Lower Your Mortgage Rate?

Locking in an interest rate can feel suffocating when you’re buying a home. What if the 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.

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 gives borrowers 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. Most lenders charge a fee, which is usually a percentage of your loan amount. The float-down agreement allows you to use a mortgage rate lock to hedge against higher rates while taking advantage of lower rates if they fall.

How Rate Float-Downs Work

If you want the option to float your rate down, 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, you must know what circumstances will allow you to take advantage of the lower rates. Here’s how it works.

Read The Fine Print

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 in 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.

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.

Get 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. It’s important to 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.

Float-Down Mortgage Specifics

When it comes to exercising your right to a float-down mortgage, it’s important to be aware of all the details. Let’s take a look at each of the specifics surrounding the float-down option.

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 $200,000 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 Federal Housing Administration (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, you should monitor mortgage rates if you have a float-down mortgage so you can decide if and when you should exercise the option. Always 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

Since 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 Mortgage?

The float-down option isn’t for everyone. First, you’ll need to 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.

Pros

• You have protection against higher interest rates
• You have the chance to take advantage of lower rates
• You get the peace of mind that you have a rate locked in

Cons

• A rate lock with a float-down option is more expensive
• You must still check mortgage rates to see if you can use your option
• It’s speculative, since no one can predict what mortgage rates will do

Alternatives To A Float Rate

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

• Refinancing the mortgage in the future if/when rates drop
• Take an adjustable-rate mortgage and take advantage of lower rates when they fall (this has a risk, though)
• Skip the float-down and take a straight lock and consider refinancing in the future

The Bottom Line

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.