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