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.