Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Rate Lock Float Down

What it is:

A mortgage rate lock float down is a provision that allows a borrower to obtain a lower rate if interest rates decline during the process of applying for a mortgage.

How it works (Example):

Lenders usually allow those applying for a mortgage to lock in a specific mortgage rate using a mortgage rate lock. A mortgage rate lock allows a borrower to keep a quoted mortgage rate while he or she completes the mortgage application process. A mortgage rate lock float down is an enhancement that not only allows a borrower to lock in a specific rate but also allows them to obtain a lower rate should interest rates fall in the interim.

For example, suppose a borrower locks in a rate of 5%. Prior to the borrower's completion of the mortgage application, interest rates drop to 3.5%. If this borrower has a mortgage rate lock float down, he or she may lock in the lower mortgage rate before the mortgage is approved.

Why it Matters:

A traditional mortgage rate lock protects borrowers from a rise in interest rates. It also discourages them from leaving the application process in pursuit of a lower rate if interest rate levels fall. A mortgage rate lock float down offers the best of both worlds, shielding borrowers from rate increases while allowing them to immediately benefit from a rate decline. Borrowers should be aware that lenders typically charge higher deposits on mortgage rate lock float downs than on traditional mortgage rate locks.