Float Down

In Float-down, the lender is committed to the terms agreed upon if interest rates go up before closing, but if rates go down the borrower has the right to lock again at a lower rate. A float-down provides the same upside protection as a lock, plus an option to reduce the rate if market rates decline.  Like a lock, a float-down is an option that can be attached to any kind of mortgage.  Since it carries more value to the borrower than a lock, however, and is more costly to the lender to provide, the borrower pays more for it. 

On a lock, the lender promises that the loan terms agreed upon will be honored when the loan closes, regardless of what happens to market interest rates in the meantime.   The borrower is bound by the lock if interest rates go down, and the lender is bound if they go up. 

Borrowers, however, sometimes walk away when rates go down, provided they have enough time and the inclination to start the process over again with another lender.   To prevent this, some lenders charge a non-refundable fee that borrowers lose when they walk, but many do not. 

With a float-down borrowers have the right to have the rate reduced.  They need not walk out on their obligations, relinquish any fees they have paid, and start the loan search all over again.  Usually the right can be exercised only once, at which point the float-down converts to a lock. 

But a float-down comes at a price. Float-down terms are set by each lender who offers them -- there is no standard contract. 

On a float-down, the lender is committed to the terms agreed upon if interest rates go up before closing, but if rates go down the borrower has the right to lock again at a lower rate. Since this imposes an additional cost on the lender, the price of a float-down is higher than the price of a lock.

A borrower who accepts a lock but allows it to expire when interest rates go down so he can lock again, is in effect getting a float-down at the lock price. I call them "lock-jumpers". While lock-jumping is difficult to do on a purchase transaction where the borrower has a closing date that must be observed, on a refinance, it is easy – much too easy.

There is no standard float-down contract. Each lender develops his own. Lenders and mortgage brokers are not always careful to explain the details to the borrower at the outset. And borrowers usually don’t know enough to ask for them.

                                                                                              Top