Floats and Float-Downs

Two terms related to the mortgage acquisition process are the float and the float-down. Though they sound similar, they are two distinct ways to deal with the problem of rates changing between the time you agree to a loan and the closing date.

A float simply means that you have no rate lock at all, and are relying on the possibility that rates will not increase during the period before closing. Even a slight increase can technically be a good financial decision, since rate locks always cost a fixed amount of points, depending on how long the rate is locked in at the current level.

However, if you are considering floating your rate all the way until closing, you should take some things into account. At this point, you will be in a very weak negotiating position in relation to your broker. You won’t have any rate guarantees and you will be running out of time, unable to switch brokers so late in the game.

For this reason, it is a good idea not to float too long. You should think of getting a lock around ten days before closing, even if you have been floating previously. Another option in this situation is agreeing with your broker in advance on an objective method of evaluating the market rate on the day of closing if you are planning on floating until the end.

A float-down, on the other hand, is a special type of rate lock that protects you from rising rates but allows you to take advantage of a decrease in rates without changing lenders. You can usually only change the rate once – at this point, your deal becomes a regular lock.

When considering a float-down, you should also think of the extra cost. Float-downs sound like a great deal to the consumer, since you are getting the best of both worlds – the ability to lower your rate that comes with a float and the protection against increases that comes with a lock. However, the extra fee you pay for the float-down may cost more than it would to simply switch lenders if the rate drops substantially before closing.