Locking in a mortgage rate can protect you from fluctuating costs during the closing process, especially if interest rates are on the rise. But if rates drop after you’ve locked, you could be stuck paying that agreed-upon rate — even if it’s much higher than what’s currently available.
Some lenders offer a mortgage rate float-down option, which allows you to lower your rate during the lock period if market rates fall. Floating down your mortgage rate comes at an added cost, so you’ll have to consider your financial situation and larger market conditions when deciding if this option is right for you.
[Read: Best Mortgage Lenders]
How Does a Mortgage Rate Float-Down Work?
A float-down option allows you to lock in your mortgage rate with an extra benefit: If rates fall after you lock, you can swap for a lower rate before you close on the loan. Think of a float-down option as an add-on service to a traditional rate lock, since it’ll cost extra, too.
Terms and conditions for float-down options vary from one lender to the next, so ask these questions when deciding if a mortgage rate float-down is right for you:
— How much does it cost? Float-down fees are typically around 0.25% to 1% of the loan amount. On a $300,000 mortgage, that’s between $750 and $3,000. Some lenders may let you float down your rate once for free, but the cost may be offset in the form of higher rates or other application fees.
— When can I use it? Rates typically need to drop by at least 0.25% for you to float down your rate, such as from 6.25% to 6%. Conversely, there may be a maximum float-down, for example, 1% below your locked-in rate. So if you lock in at 7% and rates (miraculously) dip to 5.85%, the lowest rate you might get is 6%.
— When does it expire? Lenders may require that you exercise the float-down option at least five to 15 days before closing, and the float-down option typically ends when your rate lock period expires. In other words, you might not be able to float your rate right before closing or extend a float-down option if your closing date is delayed.
Even if you didn’t ask for a float-down option when you locked your rate, it’s still worth talking to your lender if rates dropped significantly during closing. They may be willing to work with you, especially if you have a better loan estimate from another lender to leverage.
Mortgage Rate Float-Down Option Example
Let’s say you locked in a rate of 6.75% on a $300,000 mortgage when you went under contract for your home, but rates dropped to 6.5% during the rate-lock period. Your float-down option costs 0.75% of the amount borrowed, or $2,250. At 6.5%, your monthly payments would be $50 lower, and it would take about three years for the interest savings to offset the cost of the float-down option.
This may seem like a worthwhile investment if you plan on staying in your home for more than a few years, but consider this: Let’s say that within three years of homeownership, mortgage rates drop to 6% or even lower. You’d probably look at refinancing to a lower rate anyway, which makes the money you spent on a float-down option feel, well, wasted.
Still, the cost of a float-down option could be much lower than the eventual fees you’d pay to refinance down the line. You’ll need to consider your specific situation, estimating how long you’ll stay in the home and calculating your break-even point for both refinancing as well as a float-down option.
Pros and Cons of Mortgage Rate Float-Down Options
Pros
— You can take advantage of better terms if mortgage rates fall during the closing process.
— The fee you pay for a float-down option may be offset by interest savings down the line.
— Some mortgage lenders — mostly credit unions — offer a complimentary one-time float-down.
Cons
— A float-down option comes at an added cost, making it more expensive than a traditional mortgage rate lock.
— Mortgage rate fluctuations are difficult to predict, and it’s not guaranteed that rates will fall during your rate lock period.
— You might be on the hook for added fees even if you don’t end up floating down your rate.
— Not all lenders offer mortgage rate float-downs.
[READ: 2024 Mortgage Forecast: When Will Rates Go Down?]
Other Ways to Get a Lower Rate After Locking
While a mortgage rate lock protects you from rising rates, you might feel like you missed a huge opportunity if rates fall during your lock period. That said, you might not be stuck paying that higher rate even if you don’t have a float-down option. Here are a few strategies to help you take advantage of falling interest rates after you’ve locked.
Switch to a New Mortgage Lender
If your lender is unwilling or unable to float your rate, you could potentially switch to another mortgage lender that offers better pricing. This strategy does come with its fair share of risks, though, especially if you’re working on a tight closing timeline.
Switching mortgage lenders can delay the closing date and potentially create problems with the seller, which could cause the purchase agreement to fall apart. You may have to submit to another hard credit check, and you could be on the hook for repeat costs like home appraisal fees and application fees.
Getting a much lower mortgage interest rate may offset the drawbacks of switching lenders before you close. Even if you don’t end up using the new lender, having another preapproved loan estimate can potentially be a valuable bargaining chip to bring to your current lender — which may offer better rates in order to keep your business.
Keep Your Rate and Refinance Later When Rates Drop
Paying for a mortgage rate float-down can help you secure a lower mortgage rate during your lock period, but prevailing interest rates are more likely to fluctuate over a longer period of time. Historical mortgage rate trends show it usually takes months for rates to drop by a full percentage point. Meanwhile, mortgage rate locks typically last just 15 to 60 days, with longer lock periods available at an extra cost.
With this in mind, consider saving the money you would’ve paid for a float-down provision and using it toward future refinancing costs. You can expect to pay 2% to 3% of the loan amount to refinance your mortgage — making it more expensive than a float-down option — but it may be more worthwhile if rates drop significantly over time and if you plan to stay in the home long-term.
You can use a mortgage refinance calculator to determine your break-even point, which is the number of months or years it would take for your interest savings to offset the cost of refinancing.
[Read: Best Mortgage Refinance Lenders.]
Is a Mortgage Rate Float-Down Right for You?
There may be some circumstances when paying for a float-down makes sense. For example, if you have a long closing timeline, there’s a greater chance that you’ll be able to exercise the float-down. This might be the case if you’re buying a new construction home with a longer closing timeline and your rate lock period is longer than 60 or 90 days.
It might also make sense to use a float-down if you can find a lender that has competitive fees for this option or if you can find a credit union that offers a complimentary one-time float-down.
Paying for a mortgage rate float-down may not be worthwhile if you have a short closing timeline or if the cost of the float-down option offsets the potential interest savings.
Of course, it’s speculative whether rates will fall during your lock period. Whether you should pay for a float-down option also depends on how long you plan to live in your home before selling it and how much you think mortgage rates will fall during that time, since refinancing in the future may help you land a lower rate anyway.
Be sure to go over your options with your loan officer — and it’s even better if you shop around with multiple lenders to compare deals.
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Float-Down Option: Can It Lower Your Mortgage Rate? originally appeared on usnews.com
