What Is a Mortgage Rate Lock Float Down?

The term mortgage rate lock float down refers to a financing option that locks in the interest rate on a mortgage with the option to reduce it if market rates fall during the lock period. A typical rate lock provides a borrower with security against an increase during the rate lock period. The float down option specifically allows the borrower to take advantage of a fall in interest rates during the lock period.

How a Mortgage Rate Lock Float Down Works

A mortgage rate lock float down is a type of mortgage product that offers borrowers both security and flexibility when interest rates fluctuate. The mortgage rate float down allows the borrower to lock in their mortgage rate. But if rates fall during the underwriting process, they can opt into the float down option to have the mortgage processed at the lower rate. This may be a sensible option when mortgage rates fluctuate or if they've been rising and falling over a short period of time.

Borrowers can request to exercise the float down option at any time before the mortgage closes to take advantage of a lower mortgage interest rate. Exercising the float down option may occur as early as one week after the mortgage proceedings get underway, depending on the terms with the lender. The terms should define the time frame that the lock is in place, which could be 30 or 60 days. The time period allows the borrower to take advantage of improved interest rates while the mortgage application is being processed.

Lenders may offer a rate lock float down option to borrowers because they don't want them to shop around or finance their loan with another institution or broker. Ideally, the lender wants the borrower's business over the long term because banks earn the interest on the mortgage minus any costs to the bank to service the mortgage.

The float down option on a rate lock does come at a cost. The borrower pays a fee for the flexibility of the float down option, which could be a few or several hundred dollars depending on the lender. As a result, rate locks with a float down option are more expensive than rate locks without the float down option.

Special Considerations

Although they may have the float down option available to them, borrowers don't automatically receive lower rates. This means it's their responsibility to opt into the lower rate as the lender has no obligation to inform the borrower that rates have fallen. The borrower must call the mortgage broker or lender to make the request for the float down option.

Here's another consideration. If rates fall and stabilize, then appear to be at the bottom of the rate cycle, it probably doesn't make sense to pay for the float down option. Borrowers may want to see rates fall enough to more than pay for the fee of the float down option. A drop from 5.10% to 5.00% during the underwriting process probably isn't enough to offset the cost of the float down option. But if there's an expectation that rates will move from 5.10% to 4.60%, the savings over the long term would likely eclipse the fee for the float down, making it a good option.

Refinancing may be an option if rates fall low enough to save money over the long term and enough to cover the closing costs of a new mortgage. Many lenders allow borrowers to refinance as early as six months after the mortgage closes. In other words, if you miss out on the float down and rates fall by a half a percentage point or more, you can always refinance and take advantage of the lower rate.

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

The mortgage rate lock float down starts with the rate lock or with a fixed-rate mortgage, but the borrower can exercise the option to take a lower rate if rates fall. The option to get the lower rate expires typically within 30 to 60 days. A convertible adjustable-rate mortgage (ARM), on the other hand, allows the borrower to take advantage of lower rates for a few years before converting to a fixed-rate mortgage.

An adjustable-rate mortgage begins with a much lower introductory teaser rate, but after a set period—typically three to 10 years—the rate is adjusted according to an index plus a margin. The rate is generally adjusted every six months and can go up or down depending on the terms outlined in the contract.

Convertible ARMs are marketed as a way to take advantage of falling interest rates and usually include specific conditions. The financial institution generally charges a fee to switch the ARM to a fixed-rate mortgage.

Example of a Mortgage Rate Lock Float Down

Let's say a borrower finds a home and makes an offer. They are now in the process of underwriting the mortgage before the closing in 30 days. The borrower decides to take advantage of a float-down option because interest rates have fallen over the last few months. Here's what their rate lock float down option may look like:

• The rate lock for the mortgage is 4.25% for 30 years.
• The borrower pays a fee for the option to lower the rate lock on the mortgage.
• Two weeks later, mortgage rates fall to 3.80%, and the borrower exercises the option for the float down.
• At the closing, the rate for the mortgage is set at 3.80% for the life of the mortgage. In other words, 3.80% is the fixed rate for the life of the mortgage.