Float-down option
Quick insights
- A float-down option could allow a one-time interest rate reduction if market rates fall after you lock a rate with a lender.
- This option may require an upfront, nonrefundable fee or involve pricing adjustments, with specific timing windows or rate-drop thresholds.
- Not all mortgage providers offer float-down options, so it’s important to ask your Home Lending Advisor early in the homebuying process.
Locking in a mortgage rate can bring you peace of mind, but what happens if your rate drops before you close on your new home? That’s when a float-down option may help. This feature allows your locked interest rate to adjust downward one time if market rates decline before your loan is finalized. For example, if you lock in a 7.25% rate but rates drop to 6.875%, a float-down option could potentially help you secure the lower rate, depending on the mortgage lender’s guidelines and timing.
Not all loan providers offer this option, and eligibility requirements can vary. Early in your homebuying journey, consider speaking with a Home Lending Advisor to see if a float-down may be available and appropriate for your situation.
What is a float-down option?
A float-down option is an added feature that may be included in some mortgage rate lock agreements. This option gives borrowers the opportunity to take advantage of lower interest rates if market conditions improve before closing. Unlike a traditional rate lock, a float-down option provides a certain level of flexibility (usually a one-time adjustment).
This option usually comes with specific terms and may involve an additional fee. While not always guaranteed to result in savings, it could be helpful for borrowers navigating a rate-sensitive market.
How a float-down option works
A float-down option lets you adjust a locked interest rate to a lower one if rates drop before closing. Here’s what you can expect:
- The rate lock: Lock in a rate (typically up to 60 days) in case rates increase.
- The float-down option: Adjust your loan terms to a lower interest rate if available, usually under specific conditions set by the lender.
- Conditions and fees: The float-down may require a minimum rate drop and can typically be exercised just once before closing, often with a fee.
Benefits of a float-down option
A float-down option may offer added advantages for borrowers looking to stay flexible in a changing rate environment. Here are a few potential benefits:
- Potential for lower interest rates: If rates decline as you shop for a home, before your loan application is processed, the float-down option could allow you to lock in a lower rate.
- Cost savings: Even a small rate reduction can save money on a mortgage loan repayment. A lower rate may lead to noticeable savings in monthly payments and total interest paid over time.
- Flexibility: Borrowers may have the opportunity to secure a rate early on without feeling locked out of future rate improvements.
- Peace of mind when the market’s unpredictable: If you’re hearing mixed predictions about where rates are headed, a float-down option may offer some breathing room in case they drop after you lock.
Potential downsides of a float-down option
While a float-down option may offer advantages, it’s key to weigh the potential drawbacks. Here are a few things to consider:
- Availability varies by loan provider: Not all mortgage lenders offer float-down options, and program details can differ greatly.
- Additional cost: A float-down option may require a nonrefundable fee or come with pricing adjustments, which might outweigh the potential benefits depending on market conditions.
- Strict eligibility rules: There are different factors that may affect and determine whether the float-down option can be used, such as timing windows, rate thresholds and lock durations.
- No guarantee of savings: Interest rates must drop by the established threshold within the eligible period for the float-down option to help.
Float-down option vs. rate lock
Understanding the difference between a float-down option and a traditional rate lock can help you make an informed decision. That will still depend on your financial goals and market outlook.
Here’s how you could compare rate locks and float-down options across key features:
- Rate flexibility: A float-down option may allow your rate to decrease one time if interest rates drop after you lock in. On the other hand, a standard rate lock remains fixed regardless of market fluctuations (whether the rate goes up or down).
- Cost and fees: Float-downs typically come with an additional fee or pricing adjustment because you’re adding flexibility to your lock. Regular rate locks generally don’t have additional charges unless extended.
- Certainty vs. Uncertainty: A locked-in mortgage rate can provide peace of mind because your monthly payments will be consistent, especially if interest rates rise. A float-down option adds adaptability, possibly letting you benefit from market dips before closing on your home.
- Timing your decision: With a standard rate lock, you get to choose when to secure your rate based on your comfort with the market.
- Availability: Not all loan providers offer float-down options, and loan terms can vary. Standard rate locks are more universally available and tend to follow a simpler process.
In summary
A float-down option may be worth exploring if you want rate protection with some flexibility in a changing market. A float-down option may not be the right fit for every borrower depending on the situation and lender terms. Understanding how it works if your lender offers a float-down option can help you make a more confident and informed mortgage decision.
