Rates Dropped After You Locked? How a Mortgage Float Down Works

You locked your mortgage rate, and then rates dropped. It is one of the most frustrating spots in homebuying, because the lock that protected you from a spike is now the thing keeping you from a better payment. The 10-year Treasury yield, which mortgage rates follow closely, closed last week near 5.10 percent after touching about 5.3 percent on Wednesday. If you locked before that move, you may be wondering whether anything can be done.

Sometimes the answer is yes, if your lock came with a float down. Here is what a float down is, how it works, what it can cost, and what to ask your lender before you lock.

What Is a Float Down?

A float down is an add on to a standard rate lock. It lets you lower your locked rate one time if market rates fall far enough before you close. You keep the protection of a lock if rates rise, and you get a chance at a better rate if they fall.

It is not automatic. In most cases you have to ask for it, the market has to have dropped by at least a minimum amount, and you have to still be on track to close. Lenders set their own rules, so two lenders can describe the same feature very differently.

How a Float Down Usually Works

The details vary by lender and loan program, but most float downs follow the same general pattern:

• It has to be part of your lock. Most lenders want it chosen when you lock, not after rates have already moved.
• Rates need to fall by a minimum amount. A common example is a quarter of a percentage point or more. A smaller drop may not qualify.
• It is usually one time only. You get one adjustment, so timing matters.
• There is often a window to use it. Many lenders only allow the request within a certain period, often closer to closing.
• Your file still has to qualify. If your credit, income or loan structure changes, the new rate is not guaranteed.

One more point that surprises people: a float down does not promise you the lowest rate of the whole lock period. The new rate is based on the market on the day you use it, so you get the improvement available then, not the best day you watched along the way.

What Does It Cost?

Lenders build the cost in different ways. It might be a separate upfront fee, a slightly higher rate than a standard lock, or a charge that applies only if you use it. Some lenders include it at no added cost. Because it varies so much, the right question is not whether a float down is worth it in general. It is whether this lender's version is worth it for your loan.

How It Works With Fairway

I am a loan officer at Fairway Independent Mortgage Corporation, and our float down is free. There is no fee and no higher rate for having it. The rules are simple:

• Rates have to improve by at least a quarter of a percentage point from your locked rate.
• You can use it up to about a week before closing, as long as there is time to make the changes and issue updated disclosures. A new rate changes your numbers, and those documents have to be redone before you close.

Those are the general terms, and they are subject to program guidelines, so I will confirm how they apply to your specific loan. The part buyers tend to miss is the timing: if you wait until the last few days, it may be too late to use it, so the request needs to happen early.

A Quick Example

Here is an illustration with round numbers. This is an example, not a quote. Say a buyer locks at 7.5 percent and rates later improve enough to qualify for a float down.

This assumes a $400,000 loan on a 30 year fixed term. A quarter point drop saves about $68 a month, or roughly $800 a year. An eighth of a point more brings it to about $102 a month, or roughly $1,200 a year. With a float down that costs nothing, using it is an easy decision. With one that charges a fee, you would want to divide the fee by the monthly savings to see how long it takes to earn it back.

Float Down vs. Relocking vs. a Lock Extension

These three get mixed up a lot, and they solve different problems:

• Float down: built into your lock, lowers your rate once if rates fall enough.
• Relock: asking your lender to cancel your lock and set a new one at today's rate. Whether this is allowed, and what it costs, depends entirely on the lender's policy. Some lenders will not do it at all.
• Lock extension: keeps your current rate when closing runs past the lock expiration date. It protects you from delays, not from higher or lower market rates, and it usually costs money.

If you do not have a float down and rates have fallen, ask your lender what your options are, but do not assume anything is available. A lock is a commitment on both sides.

When a Float Down Makes the Most Sense

It tends to be most useful when a few things are true:

• You are locking for a long period. New construction, complicated closings or longer timelines give rates more time to move.
• The market is volatile. Big swings in either direction make both the lock and the float down more valuable. We have seen that this month, with a hot CPI report followed by a sharp drop in the 10-year yield. I walked through what happened in Mortgage Rates Fall After Hot CPI and PPI.
• A big event is ahead. The Federal Reserve meets October 27 and 28. I covered what the markets expect in October Fed hike odds.
• The cost is low or zero. The cheaper the option, the easier it is to say yes.

It matters less when your closing is only a week or two away, since there is little time for rates to move enough to qualify, or when the cost is high compared with the likely savings.

Do Not Count On Rates Falling

A float down only helps if rates fall. If they rise, you are protected by the lock itself, which is the main reason to lock in the first place. The right way to think about it is as a bonus on top of a lock, not a reason to take on more risk. If you are weighing whether to lock at all, my guide on when to lock your mortgage rate covers that decision.

Questions to Ask Your Lender Before You Lock

1. Do you offer a float down, and is it part of the lock or added later?
2. What does it cost, and is that cost paid up front, built into the rate, or charged only if I use it?
3. How far do rates have to fall before I can use it?
4. Can I use it more than once?
5. When can I request it, and how long do I have?
6. If I do not have one, what is your policy on relocking at a lower rate?

Getting these answers in writing before you lock avoids surprises later. For more on comparing lenders, see 12 questions to ask a mortgage lender.

Frequently Asked Questions

What is a float down on a mortgage?
A float down is an option on a rate lock that lets you lower your locked rate one time if market rates fall by enough before closing. It is usually not automatic, and the rules depend on the lender.

Does every lender offer a float down?
No. Some lenders offer it, some charge for it, and some do not offer it at all. Ask before you lock, because it generally needs to be part of the lock from the start.

How much do rates have to drop to use a float down?
It depends on the lender. A quarter of a percentage point is a common example, but your lender sets its own minimum.

Can I get a lower rate if I locked and rates dropped but I have no float down?
It depends on your lender's relock policy. Some lenders will not do it, and others may charge for it. Ask your loan officer what is possible for your loan.

Does Fairway charge for a float down?
No. Fairway's float down has no added fee, and it can be used when rates improve by at least a quarter of a percentage point, up to about a week before closing, as long as there is time to make the changes and redisclose. Terms are subject to program guidelines.

Is a float down the same as a lock extension?
No. A float down can lower your rate when the market falls. A lock extension keeps your current rate when closing takes longer than your lock period, and it usually costs money.

The Bottom Line

A float down gives you a way to lock for safety and still benefit if rates improve before you close. It is not guaranteed, it is not free everywhere, and the rules are different at every lender, so the smartest move is to ask before you lock. With Fairway, it costs nothing, and the main thing to remember is to ask early enough to use it. If rates dropped after you locked and you are not sure where you stand, now is a good time to ask your lender what your options are.

Nate Moghadam | NMLS #906770 | Fairway Independent Mortgage Corporation | Company NMLS #2289 | Equal Housing Lender. This is general market commentary, not a rate quote or a commitment to lend. Rates, terms, and programs are subject to change without notice. All loans subject to credit and property approval. Legal Disclosures