I'm trying to understand what's involved with locking in today's mortgage rates. My California property is being refinanced. I'm nervous about locking my mortgage rate and missing out if rates go lower, but also about NOT locking my rate in case rates move higher. My lender suggested a "float down" so that I can get the best mortgage rates no matter what happens. A float down costs half a point. Should I take this route?
Taking a float-down option means that, if rates drop after you lock in your loan, you get the benefit of the lower rate. The cost depends on the length of the lock. For example, a 15-day lock costs considerably less than a 60-day lock. Other provisions included in the loan agreement can also affect the cost of the lock.
3 float down outcomes
If you locked a loan in at a 5 percent rate at the beginning of your 60-day escrow, the rate dropped to 4.875 percent the next week, and you have a float down, these three possible outcomes could occur:
- You might be able to convert the float to a lock and secure the 4.875 percent rate, but you won't be allowed to float any more. If rates go lower, you're out of luck.
- You might not be able to secure the lower rate because the float only applies at closing time. If the rate is 4.875 percent or lower at closing, you benefit. If rates are back up to 5 percent, you don't.
- You might not benefit at all. Some float downs only apply if the rate has dropped by 0.25 percent or more.
That said, you really should ask about float-downs when you shop for mortgage quotes. Check with several lenders and ask for rate quotes including float-down options. Some lenders include free float downs in their mortgage quotes to avoid losing a customer if rates drop afterward. Others might charge for the float down but offset it with a better mortgage rate quote. That's why it pays to compare.