Interest Rate “Float Down”

October 6th, 2009

It used to be that if you locked in an interest rate, you’d have a chance at a lower rate later in the transaction and prior to closing via a “float down”. A float down may, for example, allow you to initially lock-in a 6% 30 Year Fixed rate with 0 points, only to float down to a 5.5% 30 Year Fixed rate with 0 points later in the transaction if rates fall during the processing of the loan.

Different banks, lenders and brokers have different terms to put a float down into affect. Some lending institutions will not float down at all, and the rate you initially lock-in is all they will offer you no matter how rates change. There logic is that if rates rose 1%, and they called you to split the difference and take a higher rate by .5%, you certainly would not, so why should they offer you a lower rate if rates fall.

A bank may offer a float down, but may charge a fee to do so, or they may float you down to 1/8% over the new, lower rate.

A mortgage broker (as opposed to a bank or mortgage banker) may simply lock-in your loan with a new lender to get you a lower rate, or to do a “float down.” In this case floating down simply means switching lenders. But a mortgage broker has to be careful in doing that, because most banks will cut them off if they do not close numerous loans that were locked in with them originally. So “floating down” is imperfect, variable and uncertain.

When I entered into the business in 1986, there was no float down, and loans took 3-4 months to process! Now things are different, and the internet helps to make lenders more competitive, faster and more transparent.

But consumers do need to be reasonable in what they expect. The float down is more to protect the consumer to the downside, and to take advantage of a big shift in rates, not necessarily to reduce the rate by every 1/8% the market may drop.

In other words, if we lock 6%, and rates goes to 5.875%, you should not expect a float down to 5.875%. A float down is not designed to give the consumer the rock bottom rate, or to allow the consumer to be a market timer, or to give the consumer the perfect transaction.

The float down, in the end, is protection so that the consumer gets to take advantage
of a big rate move down, and to avoid having to immediately refinance after purchasing a home and pay another round of closing costs to get a lower rate.

However, with the new MDIA rules (see this blog for details on MDIA: https://www.getloans.com/blog/?p=97) there may be no float downs in the future. If you lock-in a new rate, and materially change the rate and APR, it can trigger a delay in closing that no seller may want to wait for. So float downs have become difficult to impossible, and may be going away. It is best, as always, to ask a lot of questions of a lender “before” engaging them.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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