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SmartAsset: How Float-Down Options Work

If you’re looking to buy a new home or refinance an existing mortgage, the interest rate has a major impact on your monthly payment. Interest rates often change multiple times throughout the day, so it can be difficult to know when to lock in your rate. Some lenders provide a float-down option that allows you to lock in a rate today, then benefit if rates trend lower before your mortgage closes. Let’s break down what a float-down option is, how it works and how it differs from a rate lock.

A financial advisor could help you create a financial plan for your home buying needs and goals.

What Is a Float-Down Option?

A float-down option allows a borrower to reduce their mortgage interest rate if rates dip below their rate lock. This allows borrowers to lock in a desirable rate without worrying if rates drop in the future. Locking in your rate today protects you against higher rates, while the float-down option is a risk-free opportunity to secure a better rate.

However, not all lenders offer a float-down option for their loans. And those that do often have specific rules in order to exercise your option. You may even have to pay a fee to take advantage of lower rates.

How Float-Down Options Work

For mortgage loans that offer a float-down option, this is how the process works:

  1. Lock in your mortgage interest rate.
  2. Monitor interest rates as they may change several times each day based on current trends, economic news and lender policies.
  3. If interest rates decrease enough to meet the lender’s minimum requirement, contact your loan officer to lock in the lower rate.
  4. Pay the fee to exercise the float-down option. Typically, these fees cost between 0.5% and 1% of the loan amount. For a $200,000 loan, the fee would be $1,000 to $2,000.

Rate Lock vs. Float-Down

SmartAsset: How Float-Down Options Work

When you apply for a mortgage, you can lock in the interest rate or let it float. Locking in the interest rate guarantees that your interest rate will not increase. If you do not lock in the rate, you are hoping that it will decrease before your loan closes. However, you’re also risking that the rate could increase. If the rate goes up too much, you may not qualify for the loan based on your debt-to-income ratios or the payment may be higher than your budget allows.

A float-down option is the best of both worlds. You lock in an interest rate to prevent your rate from going higher. But, you also have the option to reduce the rate if interest rates dip before your loan closes. There’s no guarantee that interest rates will drop enough to make it worthwhile, but the option gives you peace of mind that you didn’t lock your rate too quickly.

Should You Get a Float-Down Mortgage?

Here are a few pros and cons to consider before pursuing this option:

Pros

  • Rate won’t increase. By locking in a rate today, your mortgage rate will not go higher.
  • Can lower your rate. If interest rates drop, you can activate your float-down option to reduce your mortgage interest rate and payment.
  • Peace of mind. With a float-down option, you can lock in a rate now to avoid rate increases knowing that you can activate the option if rates drop.

Cons

  • Not all lenders offer float-down mortgage loans. You may limit yourself from attractive lenders and loan options by restricting your search to those with float-down options.
  • Rate drop must be large enough. Depending on which lender you choose, the interest rate must drop a certain amount in order to use the float-down option. For example, a mortgage lender may require rates to drop by 0.50% before you can activate the float-down.
  • Some lenders charge a fee. You may be required to pay a fee to activate your option. You’ll have to decide if the rate drop is large enough to warrant paying the fee.

Bottom Line

SmartAsset: How Float-Down Options Work

Getting a float-down option for your mortgage gives you the security of a rate lock with the ability to secure a lower rate if interest rates decline. Not all lenders offer this option, and those that do may charge fees for the privilege. If rates drop, you must exercise the option with your loan officer because you won’t automatically receive a lower rate. Mortgage rates can change several times a day, so there is a chance you could benefit from a float-down mortgage option.

Tips for Buying a Home

  • When evaluating mortgage options, it helps to understand how interest rates affect your monthly payment. Shorter loans like a 15-year mortgage tend to offer better interest rates and lower interest paid overall, but the monthly payments are higher. SmartAsset’s free mortgage calculator provides a monthly payment breakdown based on your loan amount, down payment, term, interest rate, taxes, insurance and HOA dues.
  • A financial advisor could help you put a financial plan in action for your home buying needs. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/fizkes, ©iStock.com/Doucefleur, ©iStock.com/ArLawKa AungTun

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