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Rates Dropped After My Mortgage Rate Lock. Is There a Float-Down Option?

After locking in your mortgage rate, you might assume you’re out of luck if rates fall. A mortgage rate lock float down lets you adjust your interest rate if it changes from the time you lock the rate until closing on your loan.

Learn how float-down programs work and when it does (and doesn’t) make sense to switch to a lower rate after you’ve locked in.

What is a mortgage rate lock float down?

Lenders aren’t obligated to lower your rate once it’s locked in. However, many lenders offer a float-down option to meet you halfway if rates drop during the mortgage process.

The float-down option is especially helpful when rates change dramatically because of volatile economic conditions like they are now with the COVID-19 pandemic. A float down can offer some affordability relief when rates are in flux.

In some cases, a mortgage interest rate lock might be ironclad, and your only option to get a lower rate is to start over with a new lender. To keep borrowers from jumping ship every time interest rates fall, lenders often have float-down or renegotiation policies so you can snag a lower rate (for a fee) and stay put as a customer.

How a float-down option works

Once you confirm your lender offers a float-down option, you need to know the standard rules to take advantage of this option. Float-down policies typically include the following features:

  • A baseline for how much rates must drop. Current rates typically need to be a quarter- to a half-percentage point better than your locked rate to get a float down. For example, if you have an interest rate lock at 3.75% and your lender requires a quarter percentage point difference for a float down, current rates would have to fall to 3.5%.
  • A renegotiation fee. Some lenders charge up to 0.50% of your loan amount for a float down. For example, if you’re floating down a rate from a current interest rate of 3.75% to a lower interest rate of 3.25% on a $200,000 loan, you might pay a renegotiation fee of $1,000 (0.50% of a $200,000 loan) to get the lower rate. The fee may be built into the interest rate of the float-down rate that’s offered or added to your final closing costs.
  • No change to the mortgage lock expiration date. You won’t get extra time to close before the lock expires if you opt for a float down.
  • You must ask your loan officer for a float down. The float-down process isn’t automatic, so call or email your loan officer to request one.
  • You may need a conditional loan approval first. Some lenders may require that your loan has received an initial approval based on a review of your credit, income and assets.

When to seek a lower rate after you’ve locked in

Asking for a lower rate means you’ll get a revised loan estimate within three business days after locking in a rate, and an underwriter will review your closing costs to ensure that they haven’t increased. Still, it may benefit you to explore a lower rate after you’ve locked in certain scenarios, such as:

You have plenty of time to close

If your closing date is still several weeks away, discuss a float down with your loan officer. Preparing a new loan estimate may take a few extra days. If you’re planning to close in a shorter time frame, however, you risk closing late if you try to renegotiate your interest rate lock right before your signing date.

You’re saving at least a quarter percentage point in rate

At first glance, this percentage point change doesn’t seem significant, but the lifetime savings definitely add up. Let’s look at an example of the effects of a float down from 3.75% to 3.5% on a $200,000 mortgage with a 30-year fixed rate.

Interest rate Monthly payment  Monthly payment savings Total interest paid Total interest savings
3.75% $926.23 $133,443.23
3.5% $898.09 $28.14 $123,312.18 $10,131.05

 

The $28.14 you save each month is minimal. But over the life of the loan, you’ll knock off $10,131.05 in total interest.

When to leave your mortgage rate lock in place

In some situations, the costs outweigh the benefits of a float down and you might be better off leaving your existing rate lock alone.

You’re about to close on a home

Purchase contracts have legally binding dates, and if yours is less than a week away, it’s probably best not to rock the boat with any changes to your rate. If you delay the timeline, you could end up paying a rate lock extension fee.

You have a challenging loan package

If you’re approved for a bad credit mortgage or need a special exception to be approved for your loan, a float down may not be possible. Check with your loan officer if you’re unsure.

 

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